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Corporate governance and national culture: A multi-country study

Article  in  Corporate Governance International Journal of Business in Society · October 2008

DOI: 10.1108/14720700810913278

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Corporate governance and national
culture: a multi-country study
Jiatao Li and J. Richard Harrison
Jiatao Li is Professor and
Head of the Department of
Management of
Organizations, Hong Kong
University of Science and
Technology, Clear Water
Bay, Hong Kong.
J. Richard Harrison is an
Associate Professor based
at the School of
Management, University of
Texas at Dallas,
Richardson, Texas, USA.
Received: 13 March 2007
Revised: 17 August 2007
Accepted: 19 August 2007
DOI 10.1108/14720700810913278
Abstract
Purpose – The purpose of this paper is to show that corporate governance structures differ significantly
across countries. Using agency theory and institutional theory, it examines how ownership structure and
national culture influence the size and leadership structure of the corporate boards of multinational firms
based in industrial countries.
Design/methodology/approach – The hypotheses are tested with data on 399 multinational
manufacturing firms based in 15 industrial countries. The authors use ownership concentration, bank
control, and state ownership to represent ownership structure. They view institutional structural norms as
components of national culture and infer the nature of these norms for governance structure from
Hofstede’s national culture dimensions.
Findings – The findings show that national culture has a dominant influence on corporate governance
structure, and its emphasis is recommended in future cross-national organizational research.
Research limitations/implications – Although the models were successful in explaining MNC board
structure, the authors addressed only the effects of ownership structure and national culture. It is
expected that these models could be improved by including national political and legal differences and
additional national economic variables.
Practical implications – The findings demonstrate that national cultures of the home countries of MNCs
have powerful influences on their governance structures.
Originality/value – This paper links national culture with governance structure.
Keywords Corporate governance, National cultures
Paper type Research paper
he board of directors is the locus of formal strategic control and governance for
T multinational corporations (MNCs). The structure of corporate governance varies
widely across developed economies, ranging from two-tiered supervisory and
management boards in Germany, to insider-dominated boards in Japan, to mixed boards in
the United States (Aoki, 1990; Charkham, 1994; Shleifer and Vishny, 1997). As global
competition intensifies, it becomes increasingly important to understand the governance
structures of MNCs and how these structures vary across home countries as well as by firm
characteristics (Jenkinson and Mayer, 1992; Roe, 1993).
Unfortunately, previous research has not paid adequate attention to the factors explaining
the wide variation in governance structures across countries (Shleifer and Vishny, 1997). The
literature has emphasized variations in political and legal constraints on ownership and
control; in particular, government regulations affect the ways companies are owned and
controlled and the processes by which ownership and control change (Jenkinson and
Mayer, 1992; Prowse, 1990).
Studies from an agency theory perspective (Jensen and Meckling, 1976) suggest that
statutory requirements and ownership structure are the key elements explaining
VOL. 8 NO. 5 2008, pp. 607-621, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 607
 cross-national variation in corporate governance structure (Hoshi et al., 1990). We argue that
a country’s socio-cultural characteristics (Hickson and Pugh, 1995; Hofstede, 1991) also
have important influences on governance structure. We will use institutional theory (Meyer
and Rowan, 1977) – which links organizational structure to institutional environments – as a
complementary perspective to agency theory.
In this paper we use agency and institutional theory to develop hypotheses concerning
variations in the size and leadership structure of MNC governing boards. From an agency
perspective, we examine the effects of three major dimensions of ownership structure -
ownership concentration, bank control, and state ownership. From an institutional
perspective, we focus on the cultural environment and examine the effects of Hofstede’s
(1980, 1991) national cultural dimensions. Our hypotheses are tested on a sample of 399
large multinational manufacturing firms based in fifteen industrial countries including
Australia, Japan, and countries in North America and Western Europe. Our findings show
that national culture has a dominant influence on corporate governance structure, and we
recommend its emphasis in future cross-national organizational research.
The paper is organized as follows. We first review patterns of corporate governance and
control practices in different countries to provide a background for our research. We then
examine the implications of agency theory and institutional theory for understanding
variations in corporate governance structures across countries. From these two theoretical
perspectives, we develop hypotheses linking ownership structure and national culture to
MNC board structure. After describing our methodology and reporting our empirical tests,
we discuss our key findings and their implications for theory and research.

Background
Home countries of MNCs differ substantially in their histories and in the nature of their
economic, political, social, cultural, and legal environments. Associated with these national
differences are differences in the governance structures of enterprises based in these
countries (Jenkinson and Mayer, 1992; Roe, 1993).
One significant effect of national environmental differences is variation in corporate
ownership structures (Charkham, 1994; Shleifer and Vishny, 1997). Jenkinson and Mayer
(1992) distinguish between two broad categories of corporate ownership structure across
countries. In the first category are the countries of Continental Europe and Japan, in which
the ownership of individual firms is often concentrated within a small number of directly
related firms, banks, and families. This concentration results in the formation of consolidated
industrial groups, and in this category, cross-shareholdings between firms are
commonplace. For example, financial institutions are large holders of equity in German
companies; German banks also act as depositories for stocks owned by other classes of
shareholders (Schneider-Lenne, 1992). In Germany, large commercial banks, through proxy
voting arrangements, often control over a quarter of the votes in major companies, and also
have smaller but significant stakes as direct shareholders or creditors; one study estimates
that about 80 percent of large German companies have a non-bank shareholder owning at
least 25 percent of the stock (Franks and Mayer, 1994). In France, cross-ownership and
so-called core investors are common, as is state ownership. In other European countries,
such as Italy, Finland, and Sweden, corporations typically have controlling owners (Shleifer
and Vishny, 1997). In Japan, about 70 percent of the outstanding equity of publicly listed
Japanese companies is owned by financial institutions and other corporations (Prowse,
1990). Although ownership in Japan is not nearly as concentrated as in Germany, large
cross-holdings as well as shareholdings by major banks are the norm (Prowse, 1990).
In the second category, which includes Great Britain and the USA, ownership is more
dispersed among a large number of unrelated individual and institutional investors. In the
United States, large share holdings, and especially majority ownership, are rare - probably
because of legal barriers to high ownership and the roles of banks, mutual funds, pension
funds, insurance companies, and other institutions (Charkham, 1994).

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PAGE 608 CORPORATE GOVERNANCE VOL. 8 NO. 5 2008
The two types of ownership structure are reflected in the composition of boards of directors.
In countries marked by concentrated ownership, such as Germany, Japan, and Sweden, the
directors of a corporation tend to mirror the company’s most important long-term stakeholder
relationships. Through their role as major providers of capital and their direct participation on
client company boards, major banks affiliated with industrial groups have access to a
considerable amount of privileged information. Their responses to virtually any aspect of
their client companies’ activities represent important signals to other corporate stakeholders
(Kester, 1992).
Despite these country differences, there seems to exist a common perception of what a
board of directors is and does from one country to another (Roe, 1993). The basic legal
concept of the board and the legal responsibilities are similar in different countries. How
boards carry out their responsibilities also exhibits a degree of consistency (Charkham,
1994; Shleifer and Vishny, 1997).

Theory and hypotheses

The board of directors has the legal authority and obligation to monitor and control corporate
activities and to protect shareholder interests (Fama and Jensen, 1983; Lorsch and MacIver,
1989). Its responsibilities include approving strategic decisions, reviewing corporate
performance, and the evaluation, compensation, and retention of top management.
We will focus on the structure of corporate boards and, in particular, on two salient
dimensions of board structure: size and leadership structure (Zahra and Pearce, 1989).
Board size is simply the number of directors. By leadership structure, we mean whether the
board chair and chief executive officer (CEO) positions are held by the same person.
Each of these dimensions is potentially significant for the board’s exercise of its authority.
Size is related to the range of expertise on the board and the breadth of participation in
decision making (Zahra and Pearce, 1989). Leadership structure is also related to board
independence and to the concentration of executive power (Harrison et al., 1988). We will
now develop hypotheses concerning these structural dimensions of boards for corporations
based in different countries, using agency theory and institutional theory to examine the
effects of corporate ownership structure and national culture, respectively.

Ownership structure
In performing its control role, a board is responsible for aligning the interests of senior
executives and shareholders to minimize agency costs and protect shareholders’ interests
(Fama and Jensen, 1983). Previous research from an agency perspective has examined the
governance mechanisms that limit the agent’s self-serving behavior. Jensen and Meckling
(1976) argue that as managers’ ownership of the firm’s stock increases, the interests of
managers and outside shareholders become more closely aligned.
Based on agency theory, we develop hypotheses that link board structure with three major
dimensions of ownership structure: ownership concentration, bank control, and state
ownership. While some of these variables have previously been examined in single country
studies, they have not been subjected to empirical testing with a large sample of firms based
in different countries. Understanding the effects of these ownership structure variables on
governance structure will shed light on how the governance and control process of firms
vary across national environments (Shleifer and Vishny, 1997).
Ownership concentration. Large publicly traded corporations are frequently characterized
as having highly diffuse ownership structures that effectively separate ownership of residual
claims from control of corporate decisions (Berle and Means, 1932; Fama and Jensen,
1983). Internal control of public companies is delegated by shareholders to a board of
directors, which then delegates most decision functions to internal agents. Agency
problems arise when decisions are made which are inconsistent with shareholder interests
(Fama and Jensen, 1983). These problems are addressed in the governance structure by

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VOL. 8 NO. 5 2008 CORPORATE GOVERNANCE PAGE 609
 separating decision management, the initiation and implementation of decisions, from
decision control, the ratification and monitoring of decisions (Fama and Jensen, 1983).

Decision control is the corporate board’s primary function, and outside directors have the
primary responsibility for advocating shareholder interests. This role is most important when
ownership is diffuse; when ownership is concentrated, the owner can effectively influence
and monitor management, sometimes by personally sitting on the board (Tosi and
Gomez-Mejia, 1989). Shleifer and Vishny (1997) argue that large shareholders have a strong
incentive to monitor managers because of their significant economic stakes. Even when they
cannot monitor management themselves, large shareholders can facilitate third-party
takeovers by splitting the large gains on their own shares with the bidder. They may have
enough voting power to put pressure on management, or perhaps even to oust management
through a proxy fight or takeover (Tosi and Gomez-Mejia, 1989).

The evidence on the role of large shareholders in influencing corporate governance is

beginning to accumulate. For Germany, Franks and Mayer (1994) find that large
shareholders are associated with higher turnover of directors. For Japan, Kaplan and
Minton (1994) show that firms with large shareholders are more likely to replace managers in
response to poor performance than are firms without them. For the USA, Shivdasani (1993)
shows that large outside shareholders increase the likelihood that a firm is taken over,
whereas Denis and Serrano (1996) show that, if a takeover is defeated, management
turnover is higher in poorly performing firms that have large shareholders. All these findings
support the view that large shareholders play an active role in corporate governance
(Shleifer and Vishny, 1997).

Large shareholders thus limit the agency problem by having enough at stake to take an
active interest in the firm, and enough influence and ownership to have their interests
respected. In a corporation without large shareholders, however, it may not pay for any one
of them to monitor the performance of management; they must rely on outside directors to
represent their interests, implying more outsiders and consequently larger boards. This
analysis, then, predicts a negative relationship between ownership concentration and the
size of the board. The same analysis can be applied to leadership structure; separate board
chair and CEO positions enhance the separation of decision management from decision
control, which is more important when ownership is diffuse.

H1. Ownership concentration is related to (a) a smaller board and (b) a consolidated
leadership position.

Bank control. In many countries, banks hold equity as well as debt in their client firms, or
alternatively vote on behalf of other investors (Jenkinson and Mayer, 1992). As a result,
banks and other large creditors are in many ways similar to large shareholders (Shleifer and
Vishny, 1997). In Germany and Japan, the powers of banks vis-à-vis companies are very
significant because banks vote significant blocks of shares, sit on boards of directors, play a
dominant role in lending, and operate in a legal environment favorable to creditors
(Schneider-Lenne, 1992). Commercial banks are well placed to perform a monitoring
function that would protect their interests as both shareholders and debtholders (Shleifer
and Vishny, 1997). By virtue of their closer involvement in the day-to-day activities of the firm,
commercial banks may have cheaper and better access than other institutional investors to
the information required to monitor the firm’s investment policies.

The size of the large creditors’ equity holdings in Japan is consistent with the widely-held
view that Japanese financial institutions (particularly banks) actively monitor corporate
policy. In addition to holding equity in the firm, it is common for banks to have board
representation and to send officers directly into top management (Kester, 1992). The
significant shareholding of the large creditors also gives them opportunities to protect the
value of debt by limiting the use of suboptimal and risky investment policies (Shleifer and
Vishny, 1997).

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For the above reasons, bank ownership can reduce agency costs and allow investors to
monitor management more effectively (Hoshi et al., 1990). Using the same agency argument
as for concentrated ownership, we expect the boards of firms with significant bank
ownership to be smaller and more likely to have a consolidated leadership structure.
H2. Bank ownership is related to: a smaller board; and a consolidated leadership
position.

State ownership. In some countries the state may be a significant corporate stockholder
(Jenkinson and Mayer, 1992). The tax-paying public holds implicit shares in the residual
income of state-owned firms. Because these shares are implicit and non-transferable as well
as widely dispersed, members of the public or organizations outside the government have
minimal incentives to directly monitor the management of state-owned firms.
While in theory state-owned firms are controlled by the public, the de facto control is in the
hands of bureaucrats (Shleifer and Vishny, 1997). These bureaucrats can be thought of as
having extremely concentrated control rights, but no significant cash flow rights because the
cash flow ownership of state firms is effectively dispersed among the taxpayers of the
country. Moreover, the bureaucrats typically have goals that are very different from social
welfare, and are dictated by their political interests.
State-owned firms have been assumed to pursue maximization of political support. When
the state is a major owner, it is especially important for the board of directors to appear to be
legitimate and accountable to the public. Public accountability suggests that the
governance structure of firms with state ownership resembles that of firms with low
ownership concentration, since the implicit public ownership in such firms is widely
dispersed. This leads to H3:
H3. State ownership is related to (a) a larger board and (b) separated leadership
positions.

National culture
Organizations can be viewed as social entities integrated into the institutional and value
structures constituting the culture of a society (Swidler, 1986); in this view, organizations and
societies tend to reflect each other structurally. In particular, national cultural differences
influence the shape and functioning of organizations (Hickson and Pugh, 1995; Hofstede,
1991).
Hofstede (1991) and Scott and Meyer (1994) argue that national culture includes shared
beliefs about organizational models. Presumably, these models are a result of the
socialization process of individuals in a society. According to Berger and Luckmann (1966),
children are subjected to primary socialization – the internalization of meaning, values, and
beliefs concerning the world – as they are raised. Further socialization, such as beliefs about
organizations, is constrained to be consistent with the foundation established by primary
socialization (Berger and Luckmann, 1966). Executives – socialized from an early age to the
value orientations of their cultural heritage and reinforced in these views as they rise through
the managerial ranks – bring these beliefs about organizational models to their senior
management roles and responsibilities (Hambrick and Brandon, 1988).
The ‘‘fit’’ between cultural values and organizational structures may be viewed as arising
from the implicit models of organization associated with our culture (Hofstede, 1991); we
prefer organizational arrangements that are consistent with our basic cultural perspective.
Going back a step further, we could argue that the values symbolized by organizational
structural elements must be congruent with cultural values if these structural elements are to
be included in our implicit models (Hambrick and Brandon, 1988).
These models include institutional norms (Meyer and Rowan, 1977), or beliefs concerning
appropriate organizational structures. Institutional theory (DiMaggio and Powell, 1983)
views organizations as achieving legitimacy, resources, and ultimately survival by

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VOL. 8 NO. 5 2008 CORPORATE GOVERNANCE PAGE 611
 conforming their structures to institutional norms. These norms are a part of the external
social environment in which firms are embedded (Scott and Meyer, 1994). Since these
norms constitute shared belief systems of a society, they can be conceptualized as
components of the society’s culture.

Given the culture-structure link, what are the implications for corporate governance
structure? As perhaps the most visible part of corporate structure, we would expect
governance structure to be particularly influenced by national culture. Institutional theory
contributes to this approach by identifying formal organizational structural norms –
including institutional norms for board structure – as components of national culture.

If board structure expresses the culture of a society, then we expect it to be related to the
cultural dimensions identified by Hofstede (1980). Hofstede (1980, 1991) identifies four
major dimensions of national culture – power distance, individualism/collectivism,
masculinity/femininity, and uncertainty avoidance. Power distance is a preference or
tolerance for inequality, individualism/collectivism refers to a need for getting ahead versus
belonging, masculinity/femininity refers to domination versus cooperation, and uncertainty
avoidance is a lack of tolerance for ambiguity. Hofstede (1991) and Hickson and Pugh
(1995) link these cultural dimensions to organizations; in their work, the most important
structural linkages are that high power distance is associated with strong authority and steep
hierarchies, and that uncertainty avoidance is associated with formalization.

Hofstede’s (1980) framework has been criticized on both empirical and theoretical grounds
(e.g., one time, single company data; dimensions derived from post-analysis factor
structure). Nevertheless, on balance, Hofstede’s framework has been largely validated (e.g.,
Sondergaard, 1994) and provides a reasonable representation of national cultural attributes
for the purpose of the present study (see also Hickson, 1996).

Institutional norms inferred from Hofstede’s cultural dimensions lead to our hypotheses
concerning cross-country differences in board structure. It seems obvious to us that
governance structure is also influenced by differences in countries’ economic, political and
legal systems. However, we are restricting our attention to cultural differences because at
the present time we have no reliable way to operationalize the political and legal differences
for purposes of hypothesis testing. We will include country-level economic variables as
controls in the models.

Power distance. Power distance is generally defined as ‘‘the extent to which the less
powerful members of institutions and organizations within a country expect and accept that
power is distributed unequally’’ (Hofstede, 1991, p. 28). According to Hofstede (1991),
relatively large differences in power among organizational members are accepted and
tolerated more in some cultures than in others. High power distance cultures prefer strong
authority and steep hierarchies in part because they help preserve the existing social order
and its related distribution of power (Hofstede, 1980). In high power distance cultures,
organizations tend to be centralized with power concentrated in a few hands, and they
exhibit large differences in authority, salary, and privileges between those at the top and
those at the bottom. In low power distance cultures, organizations are more decentralized;
there is more consultation in decision making, and independent action by less powerful
organizational members is valued and encouraged.

Board size is a frequently mentioned indicator of board control over the CEO (e.g., Ocasio,
1994; Zahra and Pearce, 1989). Large boards are not as susceptible to managerial
domination as their smaller counterparts, and are more actively involved in monitoring and
evaluating CEO and company performance, normally through specialized committees
(Zahra and Pearce, 1989, p. 309). Ocasio (1994, p. 292) argues that a large board is more
likely than a small one to generate alternative political coalitions that challenge the CEO; he
cites a director who said that ‘‘removing a CEO required a critical mass of key players to shift
the coalition against the incumbent, and this was more likely in larger boards’’). In smaller
boards, CEOs may exert greater personal control over individual board members and are

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more likely to prevent the emergence of alternative coalitions that threaten their power and
survival. Therefore, we expect a smaller board in high power distance countries.
Westphal and Zajac (1994) argue that a CEO who serves simultaneously as chairman of the
board has greater stature and political influence over board members. The power of the CEO
can be counterbalanced by a separate board chairman, who is more likely to advocate a
shareholder perspective. A consolidated CEO/board chair position is clearly a more
powerful authority figure; from a cultural perspective, this leadership structure embodies the
greatest power distance.
H4. Power distance is related to: a smaller board; and a consolidated leadership
position.

Uncertainty avoidance. The cultural dimension of uncertainty avoidance concerns response

to unstructured and ambiguous contexts. In high uncertainty avoidance cultures, members
rely on clear procedures, well-known strategies, and well-understood rules to reduce
uncertainty and cope with their discomfort with unknown situations (Hofstede, 1980). In low
uncertainty avoidance cultures, there exists a greater tolerance for uncertainty. Members are
relatively more at ease with unfamiliar situations, and presumably more tolerant of different
ideas, approaches, and concepts.
Uncertainty avoidance has been shown to affect organizational-level variables (Hofstede
et al., 1990). It has been associated with formalization, which is an attempt to control
behavior indirectly by relying upon rules, procedures, and records as methods for limiting
discretion and for monitoring activities (Hofstede, 1980). In high uncertainty avoidance
cultures, detailed controls are considered superior to vague controls (Hofstede, 1980).
Close control of subordinates is imposed through the use of detailed instructions or limited
authority.
In high uncertainty avoidance cultures, people (and organizations) are more sensitive to
risks, and perceive a higher level of risk and uncertainty in a given situation than in low
uncertainty avoidance cultures (Nooteboom, Berger, and Noorderhaven, 1997). Higher
uncertainty avoidance implies a greater discomfort with uncertain and ambiguous situations
and consequently a greater need to reduce the uncertainty by seeking out more information.
Researchers argue that larger and more diverse groups have more skills and abilities with
which to solve complex problems (Jackson, 1992) and consequently have greater
information processing capabilities (Dutton and Duncan, 1987). Since outside directors
have more diverse expertise and access to more varied sources of information than insiders,
we expect a larger board in high uncertainty avoidance countries. Separate board chair and
CEO positions provide greater leadership diversity and hence greater
information-processing capacity for the board.
H5. Uncertainty avoidance is related to: a larger board; and separated leadership
positions.

Individualism/collectivism. Individualism refers to the preferred level of individual freedom

and opportunity. In cultures with strong individualistic values, societal members perceive
themselves largely as individual actors. In organizational contexts, individualist values have
been linked to preferences for individual decision making over group consensus (Hofstede,
1980). By contrast, in societies emphasizing collectivist values, interpersonal relationships
and group affiliation are highly touted. The self is defined as a part of the group; one’s group
memberships are an important statement of identity and achievement. Concerns over group
welfare, equality, and loyalty are prominent, as aggregate interests tend to prevail over
autonomous ones (Hofstede, 1991).
Collective cultures place greater emphasis on group affiliation and group activity, so are
expected to have more inclusive boards. More individualistic cultures are expected to have
smaller boards, where each individual’s influence is greater because of fewer participants.
A consolidated leadership position eliminates the necessity of sharing power with another

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 top executive, providing strong individual leadership and the highest level of individual
freedom.
H6. Individualism is related to: a smaller board; and a consolidated leadership
position.

Masculinity/femininity. Aggressiveness and its opposite, nurturing, refer to the degree to

which a society embraces either stereotypical masculine values, such as competitiveness,
assertiveness, ambition, and acquisition of material possessions, or a value orientation with
more emphasis on caring for others (Hofstede, 1980; Very et al., 1997). In masculine
cultures, preferences favor managerial decisiveness and a performance orientation, with an
emphasis on personal dominance; in feminine cultures, a more supportive social orientation
is observed, accompanied by a strong concern for the preservation of existing relationships.
Performance-contingent rewards, merit pay, and management by objectives are practices
consistent with a ‘‘masculine’’ culture, while attention to interpersonal relationships and
quality of work-life issues are consistent with a ‘‘feminine’’ culture (Hofstede, 1991).
Board structure both embodies and symbolizes the dominance, assertiveness, and
accomplishments of the CEO. CEO dominance is enhanced by a larger board, which
signifies a greater scope of command and control and a dilution of individual director
influence. Dominance and assertiveness are also related to a higher proportion of insiders,
who depend on the CEO for their primary jobs. A combined CEO/chair position provides a
more powerful symbol and a greater realization of control for the individual holding the
position, and such an individual may also have high symbolic value for societies with strong
personal dominance values.
H7. Masculinity is related to: a larger board; and a consolidated leadership position.

Methods
The hypotheses were tested on a sample of 399 multinational manufacturing firms based in
fifteen industrial countries with wide variations in ownership structure and institutional
environments. The study examines the effects of ownership structure and national culture
variables on the two dimensions of governance structure (board size and leadership position
consolidation), controlling for the effects of firm size, performance, capital structure, and
country-level economic variables. The sample was taken from the third edition of the
Directory of Multinationals (Stafford and Purkis, 1989), which profiles the world’s 450 largest
industrial corporations with sales of over one billion US dollars and significant international
operations in 1987. From these 450 firms, we eliminated 51 because of unavailable data or
because they had two-tiered boards (which are legally required in Germany, Finland,
Denmark, and The Netherlands). The 399 sample firms were largely based in the ‘‘triad’’
region of Japan, Western Europe, and North America – including 59 Japanese firms, 121
European firms, 193 USA firms and 26 firms from other industrial countries.
Data on board structure and ownership structure for 1987 were obtained from the Directory
of Multinationals and checked and supplemented with other sources such as Standard and
Poor’s Register of Corporations, Directors and Executives, Moody’s International, and
corporate annual reports. These sources plus Fortune 500 and Fortune International 500
provided data for the independent and control variables.
Board size is measured as the number of directors on the board. The leadership structure
is coded as ‘‘1’’ if the board chair and CEO positions are consolidated and ‘‘0’’ otherwise.
Because of data limitations, we use dummy variables rather than continuous variables to
indicate ownership concentration, bank control, and state ownership. Ownership
concentration is coded as ‘‘1’’ if a single shareholder owns five percent or more of
shares in the firm, and ‘‘0’’ otherwise (Tosi and Gomez-Mejia, 1989). Bank control and
state ownership are dummy variables indicating five percent or more ownership by a
bank or the government, respectively. The study also included the four dimensions of
national culture: power distance, uncertainty avoidance, individualism/collectivism, and

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masculinity/femininity. These measures were taken from Hofstede (1980) and were
defined earlier.
Our theoretical model focuses on the effects of ownership structure and national culture.
Other firm-level variables such as firm size, debt, and performance may also affect board
structure, and it is important to include these control variables in the empirical analysis (Tosi
and Gomez-Mejia, 1989). Firm size is the natural logarithm of average annual sales in
1986-1987, measured in US$ billions. Debt is the average debt ratio in the period 1986-1987
(calculated as long-term debt over total assets). Performance is measured as the profit
margin for the year 1986, using a one-year lag to gauge the effects of poor performance on
governance structure (Harrison et al., 1988). We make no predictions concerning the effects
of these variables, although we expect larger firms to have larger boards.
We also included three country-level economic variables to indicate a country’s level of
economic development, and its openness to international financial markets. GDP per capita
is used to measure a country’s level of economic development; data were obtained from
World Bank. The corporate governance system in a country is likely to be affected by
institutional pressures from international financial markets. We use two indicators to control
for this pressure. The first is the amount of funds raised in international markets as a
percentage of GDP, including international and foreign placement of bonds, international
and foreign bank loans, and other international facilities. The second variable is the degree
to which foreign investors are free to acquire control in a domestic company, indicating the
international market for corporate control. These data were obtained from the World
Competitive Report (1990).

Estimation method
The hypotheses concerning effects of ownership structure and national culture on board
size were tested using the OLS regression analysis, as in the following equation:
Board Size ¼ b0 þ b1 Ownership concentration þ b2 Bank control þ b3 State ownership
þ b4 Power distance þ b5 Individualism þ b6 Masculinity þ b7 Uncertainty avoidance
þ b8 X þ 1

where Board Size is the dependent variable; X is a set of control variables that are expected
to have a bearing on board size. b0 to b8 are the parameters to be estimated, and 1 is an
error term.
Logistic regression was used to test hypotheses concerning leadership position
consolidation, as in the following equation:
Prob ½Leadership consolidation ¼ 1
¼ b0 þ b1 Ownership concentration
þ b2 Bank control þ b3 State ownership þ b4 Power distance þ b5 Individualism
þ b6 Masculinity þ b7 Uncertainty avoidance þ b8 X þ 1

where the dependent variable, Leadership consolidation, predicts the probability that the
board chair and CEO positions are held by a single person.

Findings
The findings are reported in Tables I and II, where the dependent variables are board size
and leadership position consolidation. Five models are reported in each table. The first
model includes the control variables only. The second model shows the effects of the
ownership structure variables, controlling for firm size, performance, capital structure, and
the three country-level economic variables. Because the national cultural dimensions of
power distance and uncertainty avoidance are highly correlated, they are entered into the
models separately (Models 3-4). We have also investigated potential multicollinearity issues
among the independent variables using variance inflation factors (VIFs). The maximum VIF
obtained in any of the models was 4.78, which is below the rule-of-thumb cutoff of 10 for
multiple regression models (Ryan, 1997). The fifth model tests the effects of the ownership
structure variables and national culture variables simultaneously.

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Table I Effects of ownership structure and national culture on board sizea: OLS regression estimates

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Number of directors on the board
Model 1 Model 2 Model 3 Model 4 Model 5
Standard Standard Standard Standard Standard
Independent variables N errors N errors N errors N errors N errors

PAGE 616 CORPORATE GOVERNANCE VOL. 8 NO. 5 2008

Firm-level control variables
Firm size 2.089*** 0.282 2.313** 0.282 2.045*** 0.237 2.05*** 0.237 2.108*** 0.243
Performance 20.004 0.056 20.028 0.055 0.031 0.047 0.029 0.047 0.028 0.048
Debt 1.860 1.410 21.290 1.386 0.455 1.201 0.48 1.199 0.594 1.209
Country-level control variables
GDP per capita 20.468*** 0.113 20.5*** 0.113 20.207 0.132 20.218 20.157 0.138
Funds raised in international markets 20.818*** 0.139 20.809*** 0.136 20.378* 0.178 20.419* 0.175 20.351 0.185
Ease of foreign control of local companies 20.266*** 0.018 20.267*** 0.019 0.038 0.05 0.024 0.052 0.03 0.053
Ownership structure
Ownership concentration 0.398 0.614 0.383 0.541
Bank control 1.607 1.22 20.066 1.064
State ownership 25.646*** 1.327 21.538 1.301
National culture
Power distance 20.029 0.042 0.053 0.088
Individualism 20.292*** 0.047 20.297*** 0.048 20.294*** 0.049
Masculinity
0.068*** 0.017 0.076*** 0.019 0.077** 0.024
Uncertainty avoidance
20.03 0.029 20.047 0.061
Observations 399 399 399 399 399
R2 0.475 0.503 0.634 0.635 0.637
Adjusted-R 2 0.467 0.491 0.626 0.626 0.624
F-statistic 59.10*** 43.65*** 74.91*** 75.1*** 51.85***
Degrees of freedom 6 9 9 9 13
a
Notes: Standard errors; * p , 0.05; ** p , 0.01; *** p , 0.001
 Table II Effects of ownership structure and national culture on leadership consolidationa: Logistic regression estimates
Chair/CEO position consolidation
Model 1 Model 2 Model 3 Model 4 Model 5
Standard Standard Standard Standard Standard
Independent variables N errors N errors N errors N errors N errors

Firm-level control variables

Firm size 0.149 0.145 0.093 0.15 0.118 0.149 0.146 0.148 0.125 0.156
Performance 0.032 0.028 0.04 0.028 0.043 0.029 0.035 0.028 0.051 0.029
Debt 1.462* 0.722 1.371 0.73 1.542* 0.762 1.372 0.747 1.871* 0.794
Country-level control variables
GDP per capita 20.013 0.055 20.009 0.055 0.14 0.086 0.03 0.065 0.18* 0.078
Funds raised in international markets 20.265*** 0.067 20.264*** 0.067 20.047 0.113 20.175 0.096 20.11 0.1
Ease of foreign control of local companies 0.058*** 0.009 0.056*** 0.01 0.023 0.027 0.013 0.029 20.013 0.03
Ownership structure
Ownership concentration 20.117 0.293 0.264 0.318

Bank control 20.816 0.623 21.028 0.66

State ownership 0.97 0.635 0.097 0.823

National culture
Power distance 0.082** 0.027 0.235*** 0.061

Individualism 0.085** 0.029 0.083** 0.027 0.071* 0.03

Masculinity 0.017 0.012 0.007 0.011 0.052** 0.016
Uncertainty avoidance 0.028 0.016 20.116** 0.039
Observations 399 399 399 399 399
Cases of leadership position consolidation 246 246 246 246 246
2 Log likelihood 430.97 425.97 409.02 417.58 397.59

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x2 5.51 b 24.22*** b 18.42** b 23.18*** c
Degrees of freedom 6 9 9 9 13
a b
Notes: Standard errors; Compared to Model 1; c Compared to Model 2; * p , 0.05; ** p , 0.01; *** p , 0.001

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 Table I shows the estimated models for board size. Only one of the ownership variables,
state ownership, has significant effects when the cultural variables are excluded, but in the
opposite direction from the prediction (Model 2). When the ownership variables are
excluded, two cultural variables, individualism and masculinity, are significant as predicted,
but power distance and uncertainty avoidance are not (Models 3-4). In the full model (Model
5), the cultural effects persist but the ownership effects largely disappear. Of the control
variables, firm size has a positive effect on board size across all models. Thus for board size,
only Hypotheses 6 and 7 are supported: boards tend to be larger in countries whose cultures
are higher on the dimensions of collectivism and masculinity. The cultural variables increase
the adjusted R-squared to 0.626 (from 0.467 in Model 1 with the firm and country-level
control variables only), and the ownership variables make no additional contribution to
explaining board size.
Table II shows the logistic regression estimates for the leadership consolidation models. In
the full model (Model 5), none of the ownership variables are significant, while all four cultural
variables are significant as predicted. This finding supports H4, H5, H6 and H7: the
leadership position is more likely to be consolidated in countries whose cultures are higher
on the dimensions of power distance, individualism, masculinity, and uncertainty
acceptance.

Discussion
The explanatory power of national culture variables is one of the most important findings in
our analysis. The success of the culture variables provides strong support for the argument
that norms embedded in a society’s culture affect organizational structure, at least at the
board level. It is also suggestive of the value of the contribution of the institutional theory
perspective for international research.
The culture results show that the national cultural dimensions of power distance, uncertainty
avoidance, individualism/collectivism, and masculinity/femininity have significant effects on
the size and leadership structure of corporate boards. Firms based in societies that prefer
high power distances are more likely to have a single leader as both board chair and CEO.
Firms based in societies that value higher levels of individual freedom tend to have smaller
boards and consolidated leadership positions. Firms based in societies that value personal
dominance (masculinity) also tend to have consolidated leadership positions. Firms based
in high uncertainty avoidance cultures, however, tend to separate CEO and board chair
positions. These findings confirm our hypotheses concerning the effects of national culture
on governance structure.
The agency theory hypotheses did not fare as well. The failure of ownership structure to have
stronger effects on governance structure deserves further attention. The high cross-country
variation in our sample may have swamped the within-country variation; ownership could still
have broad effects on governance structure within countries. The relatively small number of
instances of bank and state control also make effects of these variables more difficult to
detect. For leadership consolidation, the ownership concentration effect predicted by
agency theory could be counterbalanced by managerial power; agency theory predicts
separate positions when ownership concentration is low, but diffuse ownership also gives
more power to the CEO (Berle and Means, 1932), who has a vested interest in a
consolidated position. It is also possible that national culture impacts ownership structure by
influencing what forms of ownership are considered legitimate. This would explain why a
number of ownership effects were observed before the culture variables were added to the
models.
Several significant effects were also observed for the control variables. Firm size had a
strong positive effect on board size as expected, consistent with many previous studies
examining American boards. The effect of a high debt ratio on leadership consolidation, an
unanticipated finding, could represent a tendency to tighten control in the face of higher risk
or adversity. This interpretation could be tested with longitudinal studies.

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Although our models were successful in explaining MNC board structure, we addressed
only the effects of ownership structure and national culture. We expect these models could
be improved by including national political and legal differences and additional national
economic variables. Of course, the theory linking variations in these country characteristics
to variations in board structure must be developed. Extending the models of MNC board
structure to incorporate additional country variables and longitudinal data are top priorities
for research in this area. The extent to which our models are useful for explaining board
structure in smaller MNCs and in firms which are not MNCs, and in explaining other aspects
of organizational structure, are also important issues for future research. Attention to board
processes is another significant area deserving attention in subsequent cross-country
research on corporate governance. Finally, studies with a panel regression design and more
recent years of data will be another area for future research to examine the evolution of
corporate governance across countries.

Conclusion
This paper analyzed governance structure from agency theory and institutional theory
perspectives, using a sample of 399 large manufacturing firms from fifteen industrial
countries in 1987. The hypotheses focused on two basic dimensions of board structure as
dependent variables: board size and leadership position consolidation (whether the board
chair and CEO positions are held by the same person). Although cross-national differences
in board size and leadership consolidation have been observed by many scholars, factors
affecting these dimensions of governance structure have not previously been empirically
tested. To our knowledge, this is one of the first studies focusing attention on cross-national
differences in the structure of the top leadership positions.
We began this paper by noting the wide variation in patterns of governance structure across
countries. Our findings demonstrate that national cultures of the home countries of MNCs
have powerful influences on their governance structures. The influence of national culture
variables on governance structure carries a clear message for international research:
national culture can have strong effects on organizational structure and should be
considered in cross-national studies.

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Corresponding author
Jiatao Li can be contacted at: mnjtli@ust.hk

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