* We posit that national cultural practices influence the institutional environment, which in turn has an influence on corporate governance practices. We empirically evaluate these relationships using structural equation modeling.
* We utilize measures of national culture from Culture, Leadership, and Organizations: The Globe study of 62 Societies. For the institutional environment, we employ the World Bank Worldwide Governance Indicators. Consistent with theory, we find a strong relationship between these constructs. We further find that the institutional environment mediates the relationship between national culture and corporate governance practices. Corporate governance practices include measures of board accountability, financial disclosure and internal controls, shareholder rights, executive compensation, takeover defenses and ownership base, and corporate accountability and are available from Governance Metrics International.
* As both culture and institutions are linked to corporate governance practices, efforts to change corporate governance practices around the world are best informed by an appreciation of cultural as well as institutional factors.
Keywords: Corporate governance * National culture * Institutional environment * Country infrastructure * Structural equation modeling
Introduction and Motivation
With the globalization of financial markets has come increasing movement towards convergence of corporate governance guidelines, particularly with regard to board independence, protection of minority shareholders, and transparency of executive and director compensation (Dahya et al. 2002; Perotti and von Thadden 2003; Shleifer and Vishny 1997). However, this move towards convergence has often been imitation without consideration of the institutional environment required to properly ensure that the substance of these governance reforms is implemented.
The recent global financial crisis has brought to light questions about whether the U.S.' laissez faire approach to regulation is suitable in an international banking environment. European and U.S. leaders are calling for increased regulation of banks and hedge funds, and there is growing talk of the need for a global regulatory body to address the increasingly interdependent capital markets. Yet given the variation in legal and regulatory infrastructures, trading volumes and dispersion of ownership, one wonders whether a "one size fits all" approach to regulation and corporate governance is appropriate or even possible across all countries (Davies 2008; Denis and McConnell 2003; Mintz 2005; Pedersen and Thomsen 1997; Wharton 2008).
Despite marked convergence in corporate governance models and codes (Ugeux 2004; Witt 2004), variation remains in approaches to, and the outcomes of, corporate governance around the globe. This variation may be explained by differences in country-level institutional environments, which arise from differing historical and cultural contexts. In relation to this, former United States Representative Michael Oxley (2009) recently indicated that it is entirely appropriate to have different responses to corporate governance in different nations based on differences in culture.
This study empirically addresses the issue of variations in the cultural and institutional contexts in which corporate governance systems are developed and the impact of those variations on corporate governance practices. In examining culture, we particularly emphasize cultural practices that may influence attitudes surrounding financial systems. In considering the institutional environment, we emphasize "the rules of the game" (North 1990). This emphasis agrees with Aoki (2001) and Amable (2003), who specify that rules that are observed are institutions. The World Bank's Worldwide Governance Indicators, which we utilize in our research, reflect measures of institutions or "rules" as they are followed within nations. …