Responsible at home, irresponsible abroad: what responsible leadership means, and how institutions trump culture

Hong Kong executives see firms as a vehicle for the generation of family wealth

PUBLISHED : Friday, 23 October, 2015, 10:00am
UPDATED : Friday, 23 October, 2015, 10:00am

Milton Friedman famously argued that business has no responsibility towards society beyond making profits for shareholders. Few business leaders today would recognise his view as valid.

Independent of the intellectual merits of Friedman’s position, societies and the various stakeholders they contain – such as customers, employees, investors, and society at large – have come to expect firms to work towards the famous “triple bottom-line”: not only profits, but also people and planet.

The resultant emphasis on corporate social responsibility (CSR) and attendant responsible leadership is a global trend. At the same time, my colleague Guenter Stahl and I wondered whether “responsible” means the same thing in different societies. One goal was to help address a major question faced by business leaders of globally active multinational enterprises: what does it take for a firm to be perceived as a socially responsible actor in its respective overseas markets?

Contradicting your boss openly can be career suicide, as in most of Asia, or a career booster, as in most of Northern Europe

To help find an answer, we interviewed 73 top-level executives in five economies: Germany, Hong Kong, Japan, South Korea and the United States.

Our main findings are two-fold. First, executives in different societies have highly divergent conceptions of the different kinds of stakeholders the firm should serve. This is visible in both the perceived importance and positivity of feelings towards different stakeholders. Second, these differences are not explained by culture, which is where companies usually look to understand variations affecting their international activities. Rather, they are aligned with institutions, that is, the formal and informal rules of doing business in the respective society. It is not that culture does not matter. But it matters far less than commonly assumed, and in different ways than usually understood.

In Germany, the stakeholder group identified as important by the largest number of executives was shareholders. However, it also emerged as the least liked group. As one executive put it: “I consider an exclusive focus on shareholder value, however one defines it, highly questionable.” Much better liked, and almost equally important, were employees, with executives emphasising the need to take care of them. Society emerged as the third large stakeholder group. Here, the emphasis was on the need for firms to contribute to society, mostly in the context of making available needed goods and services.

The picture in Hong Kong was markedly different. Essentially, most executives saw firms as a vehicle for the generation of family wealth. Firms would then contribute to society through charity, which would also serve the dual purpose of enhancing the social status of the family or individual in question. By contrast, there was no strong sense of responsibility towards employees. (I should hasten to add that our data was collected in the noughties, so views of responsible leadership may have changed since.)

For Japan, we found a landscape similar to that in Germany. The most important and also best liked stakeholder was society at large. As one executive put it: “For a manager, the most important thing is not to improve business results during one’s time. Rather, I think what is extremely important is when one passes [things] on to the next manager, to what extent the firm is one whose shape is accepted by society, and one can ensure the permanence of the firm.” Taking care of the firm’s employees was the key component in gaining this acceptance. Shareholders, on the other hand, were seen as constraints on serving the main groups of stakeholders. A concern for customers was also salient, with an emphasis on putting customer satisfaction before profits.

The image presented by South Korean executives suggested a careful balancing act between the interests of employees and society on the one hand and shareholders on the other. This category of “shareholders” includes the families that control the country’s large conglomerates – such as Samsung, LG, Hyundai Motors and SK – even though their overall shareholdings are usually below 10 per cent. Korean society and the employees of these conglomerates have been suspicious of the motives of these families. A 2012 opinion poll, for instance, found that 74 per cent of Koreans considered the large Korean conglomerates to be “immoral”. Executives thus face the challenge of serving the controlling families while working to assuage a potentially hostile public and employee base.

US executives, finally, emphasised shareholders above all. Employees, society and customers were recognised as stakeholders but viewed as secondary. As one executive opined: “You want to be a good citizen in the community, but not because good citizenship is good, but because if you are not a good citizen, you will be punished and you will not be able to make a profit for your shareholders.”

Overall, we find a high level of similarity between Germany and Japan on the one hand and Hong Kong and the United States on the other. South Korea falls somewhere in between, but closer to the former two. This is intriguing because it runs counter to the prediction one would have made on the basis of cultural differences. For instance, the GLOBE study of world cultures has classified all three Asian economies in our sample as “Confucian Asian”. Germany and the US are in different clusters – “Germanic Europe” and “Anglo”, respectively – but their cultural differences are comparatively small. Yet, executives’ views aligned across clusters and diverged within.

This finding is consistent with an important emerging realisation in international business: culture matters, but much less than thought. Part of the problem is that “culture” has become the generic term for all kinds of differences across countries, whether they are cultural or not. Strictly speaking, culture is about how people interpret reality. Contradicting your boss openly can be career suicide, as in most of Asia, or a career booster, as in most of Northern Europe (assuming, of course, you are right). The same act is interpreted differently, and this interpretation process is “culture” in its proper sense.

What drives the differences between our economies is not culture, but the rules of the game of doing business (the “institutions”) in the respective society. For instance, economies such as Germany and Japan feature, among others, strong employee rights, coordinated collective bargaining, strong vocational training, and bank-led finance with fairly weak corporate governance. The US and, with some differences, Hong Kong feature weak employee rights, individual bargaining, weak vocational training, and market-based finance with stronger corporate governance. Given these differences, it would seem obvious that German and Japanese executives put, for instance, relatively more emphasis on employees, while their Hong Kong and US counterparts emphasise shareholders. Of course, executives’ interpretation of which stakeholders are important is in itself an interpretation, and thus an aspect of culture. But none of the existing cross-cultural frameworks accounts for this, or explains the differences.

What are the takeaways from our work? First, what you think of as responsible leadership may be considered irresponsible abroad. It is possible to address this dilemma by combining local responsiveness with global integration to formulate a transnational approach, as Stahl has written elsewhere. Second, for business leaders to succeed not only at home but also abroad, they need to know foremost about institutional differences. Culture matters, but a good deal less than commonly assumed.

Michael Witt is the programme director of international management in Asia-Pacific and professor of Asian business and comparative management at INSEAD