4.7.4 Cultural dimensions and the comply or explain principle as embedded in national corporate governance systems

Section 3.3 above discusses the relation between corporate governance and culture based on the cultural dimensions, as formulated by Hofstede and in other research conducted on the five countries under research (Hofstede 1984) (Schwartz 1999) (La Porta, Lopez-de-Silanes et al. 1998) (Mintz 2005) (Hofstede, Hofstede et al. 2011). It is acknowledged that the judicial corporate governance arrangements and thus the application of the comply or explain principle are influenced by culture, which can be regarded as an all embracing factor that incorporates others (e.g. economical, legal and political factors). Section 3.3 mentions a point ofcritique of the cultural studies described: often the primary focus is on the results (that a relation exists) and the research method. What the results today (and in the future) imply for the corporate governance in the countries under research is often not or only very briefly discussed. Simultaneously with the other relevant factors, the influence of the culture factor is each time taken into consideration by answering the eight key questions per county under research above. The results of the studies reviewed in chapter 3 are combined with the comparative theoretical analysis in the underlying chapter. This section intends to emphasise the culture factor in particular. Whilst focusing on the comply or explain principle, as embedded in the national corporate governance systems, it is specified what culture implies exactly for the countries under research.

To summarise the results of the studies on culture described in chapter 3: the UK has a market-based corporate governance system (common law) characterised by high individualism, low power distance and a weak uncertainty avoidance. How does this relate to the comply or explain principle as embedded in the UK corporate governance system? Having a market-based corporate governance system, it is of no surprise that it is British tradition to let trade and industry 'get on with it'. Clear malfunctions were necessary before corporate governance action was taken. The Cadbury Report and comply or explain principle were a good approach, since it was up to those whose interests were adversely affected (individualism and low power distance) to take appropriate action. The UK's preference for self-regulation and dislike of legislation were taken into account in this respect (weak uncertainty avoidance). Self-regulation is flexible and the contents of the code were changed regularly to adapt to current practice in the UK. The aim of the code and comply or explain principle is actually to improve the corporate governance structure of companies, as the 'made to measure' approach is believed in. The comply or explain principle has, since the beginning, been considered the trademark of UK corporate governance. The UK'sweakuncer-tainty avoidance can also be seen in the fact that, over the years, the code did not increase much in size and detail compared to other countries. With respect to the contents of the code, the UK refused to legislate the norms of the code, which differs from some other countries under research (Belgium and Germany), where much of the code's contents are laid down in legislation (weak uncertainty avoidance). Likewise as regards the comply or explain principle itself, which is embedded in listing rules and not in regulation as in the other countries under research. It is argued that since the code, based on self-regulation and the comply or explain principle, with its ' made to measure' approach, are so much a part of the UK's culture, it is no wonder that the compliance studies discussed above show few compliance issues in the UK.

To summarise the results of the studies on culture described in chapter 3: Belgium has a bank-based corporate governance system characterised by high individualism, high power distance and strong uncertainty avoidance. How does this relate to the comply or explain principle as embedded in the Belgian corporate governance system? Contrary to the UK, in the case of Belgium it is difficult to see the relation, which on the other hand is the effect of the Belgian culture as well. The UK Cadbury Report functioned as a guide for the development of the Belgian corporate governance rules. It was of no use for Belgium to formulate rules that differed from other countries; the renewed Belgian corporate governance practices had to encourage international investors and completely different and new corporate governance rules would not be appreciated (uncertainty avoidance). As a consequence, some typically Belgian corporate governance practices (e.g. the block holders and executive committee) are almost not discussed in the code. Especially the scores on power distance and uncertainty avoidance are high compared to the other countries under research, although these scores are not that easy to relate to the Belgian corporate governance system and more specifically the code, due to the strong influence from abroad. The uncertainty avoidance in Belgium is possibly retraceable to the fact that Belgium has extensive company law and the code is complementary to existing law; no provision of the code may be interpreted as derogating from Belgian law. The code itself is also very comprehensive with 9 principles, 89 code provisions, 41 guidelines and 6 appendices. The Belgian code compliance studies as discussed above reveal increasing difficulties in explaining deviations sufficiently, which shows that the comply or explain principle and the 'made to measure approach' are not common practice yet in Belgium. The Belgian code's first aim was to strengthen Belgium's competitive position and Belgium thus opts for real convergence in corporate governance practices without being innovative and taking any risk which, again, can be explained by its culture.

Germany in particular scores high on the uncertainty avoidance index, low on the power distance index and, compared to the other four countries under research, low on individualism. A relation between these scores and the comply or explain principle as embedded in the German corporate governance system can be detected. Strong uncertainty avoidance societies maintain rigid rules and, as discussed above, legislation plays a very important role in Germany. A strong desire for binding legislation exists: the tendency was to incorporate new corporate governance regulation in legislation and the possible unconstitution-ality of a German self-regulation corporate governance code was therefore often discussed. The first German corporate governance code explicitly needed to be based in art. 161 AktG. Corporate governance arrangement D applies to Germany; regulation of self-regulation or, in other words, the legislation has more than a supporting role as regards the corporate governance code. The code and comply or explain principle needed an embedding in legislation to gain value and the contents of most code provisions are a repetition of German legislation, with only an explanatory nature. Hence, an extra supervisor of formal code compliance (e.g. the listing authority), as is common practice in the other countries, was considered unnecessary. Intolerance towards nonconformists is a characteristic of strong uncertainty avoidance as well and German code compliance research does indeed show very high compliance scores. Germany is considered to be the standard example of the relationship-based insider controlled and stakeholder-orientated system, which is also reflected in the code's aim to promote the trust of international and national investors, customers, employees and the general public in the management and supervision of listed German stock corporations.

To summarise the results of the studies on culture described in chapter 3 described: Italy has a bank-based corporate governance system characterised by high individualism, high power distance, strong uncertainty avoidance and masculinity. How does this relate to the comply or explain principle as embedded in the Italian corporate governance system? The Italian corporate governance committee itself acknowledges the importance of culture by stating that corporate governance is the result of norms, traditions and patterns of behaviour and is certainly not based on a single model, that can be exported and imitated everywhere (Italian Corporate Governance Code 1999, p. 18). The Italian ' family capitalism' resulted in an insider corporate governance system that is relationship-based, avoided by small shareholders and sometimes considered underdeveloped. The development of the first Italian code was market-driven and its aim was to offer the Italian listed companies an instrument for further reducing the costs of raising funds in the internationalising capital markets. There was even scepticism towards self-regulation (risk avoidance). Nevertheless, nowadays corporate governance arrangement C applies to Italy; self-regulation facilitated by statutory rules (art. 123-bis of the Consolidated Law on Finance). Although the principles and criteria of the Italian code are increasingly in line with international corporate governance practice, the code's aims and emphases still show cultural traditions and strong path dependence. The high individualism and masculinity scores are evident in the primary objective of the code, the maximisation of shareholder value. In Italy it is believed that these aims can be achieved by control and power concentration. Hence the limited separation between ownership and control, the pyramid structures and cross shareholdings (individualism). Code compliance studies are limited and show quite an ambiguous image. Formal and material code compliance seem to differ substantially. The quality of corporate governance statements has been improving in recent years and some principles have a compliance rate of almost 100%. Nevertheless, an increasing number of companies explicitly declare that they do not or not totally adopt the code, which according to listed companies association Assonime seems to be the result of an increased awareness of corporate governance matters and a ' one size does not fit all mentality'. Hence, in Italy the relation between culture and the comply or explain principle as embedded in the Italian corporate governance system is difficult to pierce. On the one hand, the aim is to come in line with international corporate governance practice and, on the other hand, innovation is still thwarted by cultural patterns such as family capitalism and power concentration.

The Dutch scores on cultural dimensions can be related to the comply or explain principle as embedded in the Dutch corporate governance system. The Netherlands score low on power distance, have weak uncertainty avoidance and score extremely low on masculinity. The scores on these three cultural dimensions cohere with a self-regulation code from a stakeholder approach. Above all, the aim is to achieve good relations (femininity) and a dialogue between the parties concerned (low power distance) (Code 2008, Preambles 3 and 4). Judicial corporate governance arrangement C (self-regulation supported by statutory rules) applies to the Netherlands by means of the Dutch Civil Code and an administrative order. At first glance statutory rules to embed the code and principle do not seem to be in line with the weak uncertainty avoidance in the Netherlands. However, the Netherlands was one of the first countries to attribute so much importance to the code and principle that legal embedding was considered necessary, which was innovative at the time. The code and principle were taken seriously and the aim was to enhance the corporate governance structures within companies significantly and not merely to use the code as a marketing instrument. The Dutch code has more than an explanatory nature and tries to stimulate discussion (low power distance) and pave the way for changes in legislation and in code contents. The low score on power distance in the Netherlands is reflected in the importance of discussion and dialogue. During the years in which the 2003 and 2008 codes were in force the corporate governance committees recommended that companies put their corporate governance structure and code compliance on the agenda of the shareholders' meeting as a separate item for discussion and the corporate governance statement may be put to the vote. Each year since 2004 the Dutch Corporate Governance Code Monitoring Committee has published an advisory and evaluation report. The Monitoring Committee is definitely not a supervisor of code compliance but it is an important participant in the Dutch corporate governance discussion (low power distance). As stated above, the code and principle are taken seriously in the Netherlands, as reflected in the levels of compliance found in the studies conducted so far. A fixed set of often reoccurring deviations can still be seen where ' traditional' topics are concerned, such as the appointment period, severance payment and board remuneration. An average of five deviations per company seems quite high, but possibly the fact that the Dutch code is quite detailed plays a role and also the fact that the Dutch government does not choose to legislate the unpopular best practice provisions, since it believes in a ' one size does not fit all' mentality. As is the case for the UK, the code and comply or explain principle are actually part of Dutch culture.

With respect to the main features of the countries' cultures as related to the code, a diverse image can be seen that is also related to the reasons for the drafting of the code. Sometimes country specifics (e.g. for Belgium a hybrid board structure, dominance of holding companies, pyramidal ownership and the controlling shareholder) are hardly to be found in the code, since the country uses the code as a marketing tool and wants to be consistent with the international standard best practice (Belgium and partly Germany), or copies the front-runner, the UK (Belgium) or wants to regulate certain country specifics in detail in its legislation. On the other hand, Italy strongly emphasises the importance of culture and traditions in its code and the Netherlands focuses on its two-tier board structure and achieving good relations and a dialogue between the parties involved. To all the countries under research it applies that the standard international best practices are incorporated in the code with, sometimes, a few country specifics. Culture and the resulting differences are reflected, perhaps not so much in the contents per se, but more in the code'sand comply or explain principle's embedding and functioning in practice. The comply or explain principle and its embedding sometimes already were, or over time became part of the corporate culture, whether or not accelerated by the importance of listed companies in a country and, to quote the words of Mintz once more: "to be effective, corporate governance principles must be part of the culture" (Mintz 2005, p. 584).