Executive Rationale as an Institutional Logic - Search Faculty

Advancing Indigenous Management Theory:
Executive Rationale as an Institutional Logic
Gordon Redding
[email protected]
Michael A. Witt
[email protected]
INSEAD
1 Ayer Rajah Avenue
Singapore 138676
Singapore
T +65-6799-5388
Forthcoming 2015 in Management and Organization Review, 11(2). For verbatim quotations,
please refer to the final, typeset version on the journal website
(http://journals.cambridge.org/action/displayJournal?jid=MOR).
ABSTRACT
With this perspective paper, we seek to help open up an additional and, we believe, especially
promising avenue for indigenous management research. We explore the potential for
progress through the investigation of executive rationale, an institutional logic guiding
managerial action and enabling strategies, structures, and formal integration mechanisms.
Drawing on interviews with an elite group of executives including some of the world’s most
powerful managers, we illustrate variance in executive rationale across five major economies
– Germany, Hong Kong, Japan, South Korea, and the United States – and suggest that action
and structures in these economies are broadly aligned with the respective expressions of
executive rationale. We consequently hold that indigenous management research may
benefit from a focus on executive rationale in particular, and we propose a concrete research
agenda.
ACKNOWLEDGEMENTS
We thank Arie Y. Lewin and two anonymous reviewers for their thoughtful input and
guidance. We are grateful to the interviewees for their precious time and insights, and we
thank the Lee Foundation of Singapore for funding the field research for this paper. We are
further grateful to Emilio Manso-Salinas for conducting interviews in Hong Kong.
INTRODUCTION
The discovery and elaboration of indigenous management theory has proved challenging.
This is not for lack of interest, as journals focused on Asia, and especially Management and
Organization Review (MOR), have actively encouraged exploration of this topic at least since
the early 2000s (Leung, 2012; Lewin, 2014; Tsui, 2004). A number of promising avenues
have been opened and debated, such as the role in Chinese management of yin and yang
(Fang, 2012; Jing & Van de Ven, 2014; Li, 2012b; Li, 2014), paternalistic leadership (Farh &
Cheng, 2000), and guanxi (Chen, Chen, & Huang, 2013; Luo, Huang, & Wang, 2012).
Research in this vein has also suggested the presence of gaps in existing Western theories,
such as that on creativity (Leung, 2012). Yet as the numerous calls for further indigenous
research suggest, much of the potential for generating insights into, and from, indigenous
management theory remains yet to be captured (e.g., Fang, 2010; Lewin, 2014; Li, Leung,
Chen, & Luo, 2012; Meyer, 2006).
The objective of this perspective paper is to help open up an additional and, we
believe, especially promising avenue for indigenous management research. It broadly
responds to the call by Lewin (2014) to explore the impact of different forms of (bounded)
rationality on the ways in which individuals and dominant coalitions “architect, devise,
implement, and restructure actual organizations” (Lewin, 2014: 3). Specifically, we propose
that an important aspect of developing indigenous management theories further may lie in
understanding the embedding of what we see as “meaning systems” in their societal context.
Such phenomena may be seen as unobservable but significant influences on action, based on
the shaping of consensus among key actors about intentions and behavior. These then in turn
serve to influence their surrounding institutions, both proximate and background. They do
this by guiding managerial action, and by influencing the strategic relationship with the
surroundings of the organization. This relates to the work of Thornton and Ocasio (2008) on
institutional logics, and accepts their definition of what we call rationale as “the socially
constructed, historical patterns of material practices, assumptions, values, beliefs, and rules
by which individuals produce and reproduce their material subsistence, organize time and
space, and provide meaning to their social reality” (p. 101). The collective meaning system
shared by a group, such as an influential set of senior executives directing a firm, provides a
link between (a) individual agency and cognition, and (b) socially constructed institutional
practices and rule structures. Within the notional “boardroom,” the structural, normative and
symbolic flow together and are “processed” towards a common perception. This shared
perception is located within a social and institutional context and the context does two things:
it regularizes conduct; and it also provides opportunity for agency and change.
The features we analyze are configurations of elements capable of conditioning action,
and linked by reciprocal bonds between components, stable as a total for a period of time. An
example might be old boy networks in the city of London, attached to certain education
channels, a certain social class, employment in certain institutions, in certain roles, and tied
together by certain social behavior patterns and connections. The action in business that is
influenced is a network of information flow and shared dealings at low transaction cost due to
the established trust embedded in the configuration. The predictability of the influence
process rests largely on the strength of agreement about ideals among the actors, as their
shared mental universe is a determinant of their behavior. Such a configuration has built into
it a self-perpetuating force that fosters the mechanism’s adaptation and survival, for as long
as the wider environment remains accepting of it. Much of the shaping of action takes place
invisibly but nevertheless predictably and persistently.
In this paper we argue for such a mental universe being seen as form of rationale in
the perceptions of the actors. In other words, it contains within it not just a set of guides to
action, but a set of reasons justifying those guides. We moreover see it possible to discern
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certain key dispositions that are shared by senior executives across a national economy. This
rests on their sharing of the same wider context of business conduct in the same political
space, under the same laws and in the same social conditions. Companies and management, if
they are to thrive, become productive interpretations of national institutional logics, and what
we are pointing to here is a largely unreported reflection and determinant of that interchange.
We do not suggest primacy for this determinant, as we fully acknowledge the salience of
“material” as well as “ideational” factors in shaping economic action. But we do suggest its
inclusion in a literature that tends by habit to focus heavily on the material.
Rationale represents “reasons for” action, combining views of appropriate and
legitimate ends and means (Witt & Redding, 2009) – in essence, it provides a mental
blueprint for action. While there are different kinds of rationales for different areas of
economic activity – as we will elaborate later – we focus here on the arguably most central
kind for understanding economic action: views of why the firm exists. Such rationale is
present and likely to guide action at many different levels of the organization, but we
concentrate on that espoused by top-level executives as the group most in a position to shape
organizational structure, processes, and strategies (Hambrick & Mason, 1984; Witt &
Redding, 2009).
The sense making occurring in executive rationale is culturally embedded and
therefore varying across societal contexts. The most basic and compelling argument for this
is that culture is the social construction of reality (Berger & Luckmann, 1966), with the
extension of that argument to allow for its existence in discrete provinces of meaning
(Redding, 2008; Sorge, 2005). This variance, as we will elaborate later, provides the
backdrop for differences in managerial action and structures and thus may lead to a deeper
understanding of indigenous patterns of organizational response.
In the pages that follow, we seek to underline this potential and provide concrete
research guidance to help capture it. We commence by providing an empirical overview of
variance in executive rationale regarding the reasons for the existence of the firm across five
major economies, including two emerging and three advanced industrialized markets. We
then illustrate the face validity of the suggested link between rationale on the one hand and
action and structure on the other hand. We lay out a range of implications of these empirical
patterns for theory and conclude with a discussion of a possible research agenda from here.
EXECUTIVE RATIONALE IN FIVE MAJOR ECONOMIES
We explored the shape of executive rationale about the reasons for the existence of the firm
in five major economies: Germany, Hong Kong, Japan, South Korea, and the United States.
As Appendix A shows, our sample represents an elite group of executives that includes some
of the world’s most influential senior managers at the time of our interviews. With the
exception of Hong Kong, for which Redding (1990) has provided a prior data point, this
represents the first empirical study of executive rationale for these economies.1 For details on
data collection and data analysis as well as a more comprehensive write-up of our analysis,
we refer the reader to Appendix B, which is available as a supplement to this article from the
MOR website.
Table 1 presents a high-level summary of our results. We find that executives in the
five societies espoused fundamentally different notions of why firms exist. There was also
visible variance in terms of the stakeholders and other factors considered relevant, both in
1
By contrast, much has been said about the institutional structures of most of these
economies (e.g., Hall & Soskice, 2001; Whitley, 1999a). To the extent rationale and
institutions correspond, it is obviously possible to make conjectures about rationale on the
basis of the institutions. This paper goes beyond conjecture.
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terms of salience – viewed here as the proportions of executives referring to a given category
– and affect (cf. figures in Appendix B). German executives essentially saw the firm as a
production function, and while they agreed that shareholders mattered, they also liked them
least of all elements in their expression of rationale. Hong Kong executives described the
firm as a mechanism for families to get rich and gain status. Employees were the least liked
category and generally seen as dispensable. Japanese executives described themselves as
executing a societal mandate by taking care of their employees. Shareholders were
recognized as important but, as in Germany, not much liked. Korean executives were highly
positive about profits, a lesson they drew from the 1997/8 Asian Financial Crisis. These
profits were regarded as enabling controlling shareholders both to become rich and buy off
employee and societal discontent. And US executives saw firms as a tool for generating
shareholder value, with all other stakeholders described as subordinate to shareholder
interests. Least liked category here was customers, closely followed by employees.
*** Table 1 about here ***
These diverse rationales are expressions of espoused values. As we will lay out below
through brief discussions organized around the key themes identified in Table 1, they are
generally consistent with managerial and business practices observed in the five economies.
We recognize that our observations are indicative only of face validity of a connection
between rationale and practice, though the presence of such a link is supported by theory, as
we will lay out later.
Germany
Productionism. The interviewees suggested that the primary objective of the firm was the
production of needed goods and services for social benefit. While it is difficult to obtain
measures directly related to this aspect of rationale, the orientation toward making things is
reflected in the structure of Germany’s gross domestic product (GDP). While manufacturing
on average accounts for about 16 percent of GDP in the OECD, it accounts for about 22
percent of GDP in Germany – the highest for any nation of its economic level and essentially
unchanged from a decade previously (OECD, 2013). Consistent with this production
orientation is that of the 24 non-financial firms on the main board of Germany’s stock
exchange, 46 percent have CEOs who are by training engineers or natural scientists in fields
related to what their companies do.
Balancing Stakeholders. Like their peers elsewhere, firms in Germany have come
under pressure to focus their efforts on shareholder value. While there have indeed been a
number of institutional reforms consistent with a stronger focus on shareholders, a deliberate
mechanism of stakeholder balancing has remained firmly entrenched in German corporate
governance (Jackson & Sorge, 2012). In particular, recent reforms have not touched the basic,
legally-mandated principle of co-determination in the firm through works councils and the
right to elect half of the firm's highest decision-making body, the supervisory board (Jackson
& Sorge, 2012). Since major managerial decisions, such as factory closures or large
investments, require supervisory board approval, executives cannot afford a single-minded
focus on shareholder interests as in the United States. It is noteworthy that business seems to
have acquiesced to co-determination; there is no public contestation of the principle or its
present legal form.
Hong Kong
Business by the Family for the Family. The interviews suggested that the key objective of
business in Hong Kong was the generation of family wealth and attendant status, with control
of the business as a connected theme. Consistent with this notion, Hong Kong firms, even
listed and large ones, tend to be family businesses. In 2008, 60.6 percent of the largest listed
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firms were under family control (Carney & Child, 2012). Earlier research had indicated that
the top 15 families in 1996 accounted for 84.2 percent of GDP and held 34.4 percent of the
territory’s total listed corporate assets, compared with 2.9 percent of GDP for America’s 15
richest families in 1998 (Claessens, Djankov, & Lang, 2000).
Despite good corporate governance legislation, family shareholders may use their
dominant positions to accrue disproportionate benefits. The World Bank (2012) assesses
Hong Kong corporate governance favorably, with a 2011 investor protection score of 9 out of
10. However, some 21.1 percent of Hong Kong’s major listed firms have pyramid
shareholdings (structures usually employed to retain control in the absence of a majority
shareholding); 74.1 percent have a single controlling owner (family or otherwise); and in 82.4
percent of cases, the CEO, board chairperson, or board vice-chairperson comes from the
controlling shareholder (family or otherwise) (Carney & Child, 2012). For the majority of
Hong Kong firms, owner-families are thus fully in control, and evidence suggests that this
position may be used to expropriate minority shareholders (Cheung, Rau, & Stouraitis, 2006;
Cheung, Stouraitis, & Wong, 2005).
Low Interdependence with Employees. Interviewees indicated a low level of
interdependence with employees, consistent with the finding that psychological contracts in
Hong Kong were more one-sided than in the West, with employees owing the employer more
than vice versa (Westwood, Sparrow, & Leung, 2001). It is also consistent with relatively
low organizational commitment, as evident in turnover statistics. For large firms, annual
voluntary turnover, excluding redundancy, dismissal and retirement, was 14.5 percent in
2011 (Hong Kong Institute of Human Resource Management, 2012).
Japan
The key themes for Japan are particularly instructive in that conventional wisdom at the time
of interview expected major changes, while executives expressed values more in line with
traditional and existing practices. The evidence for this is summarized in Witt (2014a),
unless referenced otherwise.
Repudiating Shareholder Value. It is clear that Japanese executives had not bought
into shareholder-value thinking, regardless of what their corporate websites might have said.
Their rejection of shareholder primacy, and indeed the right of shareholders to become
involved in the running of the company, is evident in the development of corporate
governance structures since the interviews.
Counter to expectations at the time, Japan's corporate governance did not converge on
US-style practices. For instance, of about 4,000 firms listed in Japan, only 58 had installed a
US-style committee system by July 2012. Outside directors, key to the modern approach to
corporate governance in the United States, remain rare – the average number of outsiders on
Japanese boards was 1.76 in 2009. Furthermore, those present are not necessarily true
“outsiders;” Japanese legal definition is so loose that representatives of parent companies
qualify, and professed structural reforms are not necessarily accompanied by changed
practices.
Serving Employees. Connected with the rejection of shareholder value is a continued
emphasis on employees' interests. The traditional Japanese-firm model was that of a
“community firm” that, among others, made an implicit promise to keep male regular2
workers employed until retirement (Dore, 1973). While some changes have occurred in
employment relations since the interviews, “lifetime employment” has proved remarkably
robust, despite expectations to the contrary. Indicative of this is that between 1998 and 2010,
2
As opposed to temporary workers. On the complementary rather than substitutive role of this class of
employees, see Witt (2014a).
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despite poor economic times and shareholder pressures, average employment tenures actually
increased, regardless of education level.
Other elements of traditional Japanese employment relations have likewise seen
relatively limited change in practice. For instance, even though almost half of Japanese firms
in 2010 reported having introduced performance-based evaluations, for all industries and
wage groups, pay remains driven by seniority.
Korea
In both key themes for Korea, subsequent developments were aligned with expressed
executive rationale, one running counter to contemporary expectations. The evidence for this
is summarized in Witt (2014b), unless referenced otherwise.
Serving Shareholders. The interviews suggested ambivalence about the importance
of shareholders. This ambivalence is resolved when we separate owner-managers from
professional managers: 89 percent of the former considered shareholders to be important, but
only 50 percent of the latter. Given the historical record, it seems likely that the ownermanagers were thinking mostly of their own benefits.
Subsequent developments in Korean corporate governance are consistent with this
interpretation, but run counter to then expectations that Korea would move toward US-style
practices. Control of Korea’s largest companies by owner-managers and their families
increased from 51.8 percent of voting rights to 54.5 percent from 1996 to 2008. In 2008, the
last year for which the government published such data, owner-managers of the 28 leading
chaebol (conglomerates) held on average 14.2 percent of cash-flow rights, but controlled 49.3
percent of voting rights. Decision-making continues to be centralized on the owner family,
top-down, and paternalistic. Accordingly, the Asian Corporate Governance Association in
2010 ranked Korean corporate governance 9th among 11 in Asia, ahead only of Indonesia and
the Philippines.
Appeasing Society. The flipside of serving the interests of a small group of
shareholders is that the general Korean public views conglomerates with suspicion. For
example, a 2012 poll found that 74 percent of Koreans considered chaebol to be “immoral.”
Until the Asian Financial Crisis, the chaebol could argue to be serving the public good by
pointing to their role in Korean developmental policies. This justification was still visible in
our interviews as a residual concern with helping Korea's development.
The Crisis officially ended this role, as working for the public good became
associated with cronyism. The chaebol needed a new way to appease society and found it in
CSR programs, which were hurriedly introduced and expanded. The emphasis of these
programs has been on short-term action in the form of charity, which can be quickly curtailed
if circumstances change. Executive rationale as evident in our interviews is consistent with
these developments.
United States
The rise of the key theme in the United States, shareholder-value rationale, and its role in
shaping business and management practices has been well documented (e.g., Fligstein, 2001).
Its impact is clearly visible in corporate-governance structures that focus on aligning the
interests of managers with those of shareholders, with attendant monitoring structures, an
elaborate industry of financial analysts, and a highly fluid financial market that exposes
underperforming firms to the risk of hostile takeovers (Aguilera & Jackson, 2003; Hall &
Soskice, 2001; Whitley, 1999a). It is likewise evident in a deregulated employment-relations
system with low-cost hiring and firing, flexibility in reward-setting, and the absence of codetermination rights – which all enable firms to deploy and release human resources quickly
and relatively cheaply (Aguilera & Jackson, 2003; Hall & Soskice, 2001; Whitley, 1999a).
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Since US firms do not perform many of the social services that would be commonplace and
often required in other advanced industrialized countries, such as the provision of stable
employment or extensive skills training (Matten & Moon, 2008), CSR programs have
evolved as a means of acquiring social respectability and building a reputational buffer
against adverse events (Godfrey, Merrill, & Hansen, 2009; Matten & Moon, 2008).
IMPLICATIONS
Rationale Shapes Action and Structures
The data presented suggest certain face validity for the notion that executive rationale acts as
a contributing logic in the shaping of economic behavior. Executive rationale is that aspect of
culture that deals with the understanding of business action by key actors. Although it is
interactive with other features of the societal culture and heritage seen broadly, it is more
specifically bounded by the concerns that stem from the economic exchange and decisionmaking for which these actors are largely responsible. Such collective understanding tends to
be shared in social spaces entailing a form of membership (Redding, 2008; Sorge, 2005).
This may be formal as with a board of directors, or it may be informal, as with the fellowship
within a trade or industry or profession. The understandings that come to be shared in these
spaces, and that serve to shape action, are not always focused on a single easily specified
topic; instead they may be diffuse but still important to the actors, examples being the
managing of relationships within a business network, or the managing of flows of capital.
A conceptual framework within which to place these mental processes needs to
acknowledge a flow of reciprocal influences between agents and institutions. It is also
necessary to acknowledge the element of societal system evolution and change. For these
reasons we adopt from Archer (1996) a means of working with the definition of our object of
interest derived from Thornton and Ocasio (2008). Archer proposes a realist ontology of
dualism that rests on the principle (unlike that of structuration) that structure precedes agency
in social structure reproduction. In that case the structuring and the agency need separate
analysis before being re-united in the sharing of determinacy. There is then a sequence
operating in four phases:
1. Within a society there is a given context. Certain structural conditions exist, such as
the institutions of law, the present state of technology, and the accumulated social
axioms of the culture. These all evolve.
2. These will shape to a degree the structure and behavior of managers and organizations,
because they determine certain non-negotiable limits, preferences and expectations, so
a Japanese firm will have a Japanese form of employment. Such properties influence
senior executives as conditions they have to work with, and for which their prior
socialization will have prepared them
3. Executives interact with the received system and with each other and there evolves a
necessary form of shared sense making that helps them (a) to control action, (b) to
seek more effective action in whatever terms they define effectiveness, and (c) to take
account of their context in doing so. So they make plans and act them out
competitively. During the sense making and the planning they come to share certain
norms, values, and priorities; in other words they come to share a framework of
“meaning” that assists in the making of choices. Some of this will be shaped by
meanings shared within an industry. Some of it will be shaped by the wider societal
context and heritage. Our first empirical interest is in describing these meaning
structures.
4. These refined and evolved forms of “sense” are then used to shape action, and in turn
this action influences the societal context into which it is directed, including the
further evolution of the surrounding institutional framework. This latter societal
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shaping is our second arena of empirical interest, because it is in terms of the
reciprocal interactions in this arena that national differences are more fully understood.
In a recent review of sense-making research Brown, Colville and Pye (2015) note
growing research interest in the topic of how people appropriate and enact their “realities.”
They see research grounded in facts, such as how executives wrestle with surrounding
complexity, to be part of a positive move in social science towards a “practice turn,” citing
Whittington (2006). The importance of the concept is suggested in the position taken by
Weick, Sutcliffe and Obstfeld (2005) that sense making and organization constitute one
another. We argue further that as well as being formative influences in how organizations
work, their influence extends into the wider socio-economy to assist in shaping institutions.
In a more overall sense the review sees that “the interaction of experience, meaning
ascription, and action in processes designed to reduce equivocality and to attribute plausible
sense in ways that make the world seem stable and enduring, is fundamental to human
sociality” (p. 273). These processes over time allow for the interplay of the material and
ideational forces in society and because senior executives have control of resources and
strategies, it becomes possible to see the shaping of a business system being at least in part a
result of such dynamics.
Looking at the same issue, in a more grounded way, Mantzavinos (2004: xiv)
proposes that institutions are nothing more than shared problem solutions that individuals
have acquired while interacting with their environment. People proceed in exchange acts in
markets on the basis of their existing knowledge of how to solve problems of social conflict.
Institutions come into existence by being already anchored in the minds of people as
solutions before they start exchanging in markets. The channeling of market processes by
institutions develops and is effective only insofar as it has its counterpart in the minds of
interacting individuals. This causal relationship linking institutions and market outcomes is
founded on cognitive path dependence. He notes further that attitudes to the established order
and its possible change will depend on the learning histories of the key actors, a feedback
mechanism that is “extremely difficult to explain and sometimes even to describe ex post” (p.
xv).
Such cognitive path dependence is a necessary way of countering the human tendency,
now clear from cognition research, for individual differences in perception to be the rule.
There needs to be (and therefore there evolves) a shared set of meanings that executives can
learn, identify with, and enact, and these will then contribute to the shaping of both
institutions and action. Mantzavinos (2004: 255) summarizes the outcome:
Path dependence in economic outcomes is a cumulative phenomenon due to both institutional and
technological dependence. These in turn are anchored in cognitive path dependence which determines
the overall direction that the process of collective learning in the society takes.
The expositions of rationale in this paper, and the figures summarizing them in Appendix B,
represent the results of this cognitive path dependence in the five economies explored. We
have not conducted fieldwork on this matter in Mainland China – which suggests an obvious
avenue for future research – but by way of conjecture, we provide in Fig.1 a tracing of such
cognitive path dependence, and thus rationale, in the case of China’s role as “workshop of the
world.”
In this are depicted eight key features of the context that make up the immediate
environment in this societal “workshop” and that are sufficiently stable to function as
institutions, even though many of them are a mix of formal repetitive patterns of conduct and
informal societal norms of conduct. The wider context of China is assumed here without
being specified, except that we accept the evidence and the view of Lardy (2014: 2) that
“private firms have become the major source of economic growth, the sole source of job
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creation, and the major contributor to China’s still growing role as a global trader.” In simple
terms this is the real and immediate world surrounding the ideal type Chinese entrepreneur
and his business partners, and they have coped with it. If you were introducing an executive
outsider to this world, these issues are what you would point to as the matters that have to be
given most attention. In response to them, the dominant coalition in an enterprise needs to
agree on a set of principles that knit together into a set of guidelines for action. These will
reflect the perceived surrounding reality, the social axioms of Chinese culture (Bond et al.,
2004), the individual experiences of actors, and the norms within the subculture of the
“workshop.” They are summarized here as four principles: pay strict attention to cost control;
honor the traditions of reciprocity within the culture, and in doing so build a reputation for
reliability and trustworthiness that has high utility for both practice and social prestige (this
may well entail co-opting support from government officials); avoid risk and uncertainty by
the hedging of options and by the avoidance of high dependency; and be flexible, open and
opportunistic.
This integrated set of meanings underpins action and reinforces surrounding
institutions by constant re-affirmation of the set during their enactment. They also exist as
interpretations of much deeper civilizational ideals and codes of conduct. These latter,
derived empirically in an earlier study, are summarized by Redding (1990) as three
principles: (1) paternalism as an organizing principle stabilizes the hierarchical structures that
typify Chinese social order, and it does this by legitimizing in moral terms the implicit
contract of exchange between a leader who seeks domination and expects conformity, but
then reciprocally guarantees subordinate welfare (the same principle applying for subjectstate relations, although not always the same practice); (2) personalism is the core Chinese
principle of horizontal order, and comes into play in conditions of weak trust of strangers,
thus turning social capital into a feature that is enacted primarily through guanxi, and that
equally has a powerful moral base in Chinese ethics; (3) insecurity is the endemic condition
of stress imposed by the society on its members as an outcome of its turbulent evolution, and
by the high dependence on hierarchy (Lu, Cooper, Kao, & Zhou, 2003), and it requires actors
to prioritize having responses in place to avoid its worst impacts. In the fuller statement of the
societal model (Redding, 2005; Redding & Witt, 2007), the issue of meaning is expanded
beyond rationale per se to include these principles of vertical and horizontal order.
China and Hong Kong share a cultural heritage, but differ in the nature of the
surrounding institutional fabric. In Hong Kong this has evolved into a highly sophisticated
modern system, where rights, rich information, stable professions, long practiced and
respected law with an independent judiciary, and widespread education at global standards,
have all supported the logics of market driven capitalism and taken the society to very high
levels of per capita wealth. Economic actors in this context have had high levels of autonomy
and a freedom and incentive to act rationally. With largely the same human inputs but a
different institutional context, entrepreneurs in China have had to work out responses to the
much higher uncertainty found in China. They have done so by paying attention of necessity
to one special aspect of boundary-spanning (Santos & Eisenhardt, 2005), namely that
concerned with boundaries of power.
The business context of China is now clarifying as a set of regional political hubs with
greatly devolved power over economic action, and with that a series of vertical clientelist
structures connecting the political actors to the Party center in Beijing (Krug & Libman,
forthcoming; Wedeman, 2004; Xu, 2011). As the state sector declines in comparative
significance, the Party has taken to coopting private sector firms into its orbit of influence. In
this process, the actors on the state side have much influence they can use: access to finance,
licenses, government contracts; and on the darker side they can offer an entrepreneur freedom
from sudden inspections, or tax audits, or property expropriation. In reply to these pressures,
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the entrepreneur uses the instincts evolved over much experience of hierarchy and habituated
subordination.
These evolved instincts are identified as the combination of paternalism and dealing
with insecurity with which the actor grows up. These are brought into the firm in the minds
of the key people. In turn they then help to formulate the meaning system that stresses, in this
context, ideals of reciprocity (especially in its vertical mode dealing with government) and of
avoiding uncertainty (by reliance on the horizontal supports of reciprocity).
Special factors that set apart the Chinese context from that in other countries are (a)
the weakness of countervailing power in dealing with government unless specific adaptations
are made to co-opt support, (b) the weakness of information availability and reliability, (c)
the weak independence of supportive institutions such as chambers of commerce or
professions, (d) discrimination over financing, and (e) weak systems of legal protection. In
these conditions the managing of firm boundaries comes to rely on mechanisms adapted to
the situation. The Party may be cultivated by joining it, as have around a third of private
entrepreneurs (Lardy, 2014: 120); quoting a study by McNally (2011) done in Sichuan, he
notes that a form of “connections capitalism” has evolved whereby the Party is changing its
base of legitimacy and conceding political leverage to private business. A high reliance is in
any case normal on networks of obligation exchange and guanxi, and these include the
handling of capital-raising and the exchange of strategic information (Lin, Chen, & Lin,
2014). Secrecy is a natural response in the conditions of relative autocracy. Customers and
suppliers and partner firms become highly significant in the conditions of general uncertainty
and change, and the managing of those relations may go well beyond the kind of rational
arrangements found elsewhere. The spanning of boundaries of power in China’s private
sector requires its own frame of reference to be understood.
Overall the comparison of evolving Chinese capitalism on the mainland with other forms
of business system requires acknowledgement of one fundamental feature in China.
Economic actors do not have the same kind of agency found elsewhere in free markets. This
is less of an issue at small scale and much goes on “below the radar” in firms too small to be
of direct interest to government. But the overall trend is that in the contestable sectors of the
economy, state companies have now been largely replaced by private companies (Lardy,
2014). This suggests that the adaptation by key actors to the realpolitik of the Chinese
economy has created a new form of capitalism. It is termed differently: “connections
capitalism” by McNally (2011), “authoritarian capitalism” by Witt and Redding (2014b),
“capitalism without capitalists” by Bergere (2007), “politicized capitalism” by Nee and
Opper (2007). In all such labeling lies the implicit working through of contradictions, defined
at their most basic by Aglietta and Bai (2013: 284) as “the disadvantageous position of
intangible capitals compared with tangible ones.” We do not know if that is a scenario for a
creative breakthrough, or for an eventual loss of global competition in productivity. As
elsewhere, it will depend largely on how human and social capitals come to be most
efficiently used.
*** Figure 1 about here ***
Other Factors Play a Part
We see societies as complex adaptive systems. So we would not propose rationale, or culture
more generally, as a sole explanation of economic action and structure. We believe that it
deserves a place in the account. We also believe that its place is often overlooked, and that it
may be more significant than often acknowledged.
At the same time, there are important other factors in what is a complex equation.
Rather than argue this point at the societal level, where the logic of it is attested to by several
10
academic disciplines, we argue it at the level of the running of organizations and the thinking
that lies behind such conduct.
As already argued institutions are anchored in the minds of people. Social order
evolves, usually over long time, to provide societies with the order they need to stay stable,
and in some cases with the new order they need to pursue growth. We see such forms of
order in the economic sphere as stabilizing the provision of certain key requirements: enough
available financial capital to oil the wheels of investment and entrepreneurship; enough
human capital to provide the skills and knowledge and the willingness to work so that wealth
can be both built and shared; and enough social capital to reach a point where stable
institutions, law, and reliable information can support the doing of business with strangers (cf.
Redding, 2005). These needs foster the evolving of a particular society’s framework of
institutions, shaped as it is within a scaffolding of shared ideas and ideals. It is then the
context against which much organizational behavior evolves. External influences also intrude
to re-shape responses as most social systems are open and able to adjust. These may be
material in nature, as with new technologies, or new external market options. They may also
be ideational, as with the global impetus towards empowerment (Welzel, 2013), or pop
culture, or the learnings from foreign travel. History and founding conditions also matter
(Stinchcombe, 1965). In consequence the world of meanings and the world of institutions are
in constant interplay with the world of organizing that sits, in a sense, between them.
Executive rationale belongs within the society’s set of ideas, interacts significantly with the
society’s institutions, and that interaction feeds into the world of resulting organizations.
Influences flow reciprocally in all directions, back and forth, in a total living system.
Societal Variation in Configurations
Because the configurations are significantly influenced by the executive rationales, and
because these latter are significantly influenced by the cultural heritage of a society, the
collection of configurations will be distinct to a society. But it is not only the cultural
influence that ensures this. Each society has its own endowment of such configurations,
including political philosophy, responses to the challenge of empowerment, and traditions of
ordering the behaviors of living. Such contrasts are visible clearly in law, taxation, education
etc. A free market society will produce different configurations from those in a mercantile
state.
Executive Rationale as a Formative Influence
The evidence about how executive structures of meaning can shape a society in powerful
ways is provided convincingly in McCloskey’s (2006, 2010) work on the role of “bourgeois
virtues” and “bourgeois dignity” in shaping some of the world’s currently most highly
developed systems of capitalism. Here she argues that much of the structure of the
institutions that fostered the western industrial revolutions was shaped by initiatives starting
in boardrooms. Parallel evidence is visible in the centrality of Mittelstand ideals in the
German economy; as Quack and Djelic (2005) report by way of example the shift towards
adoption of antitrust and competition law in Germany – and later throughout Europe – was a
result of trickle-up pressure from the business community as much as trickle-down from the
political sphere. Their metaphor is that the cave gets filled with stalactites from above and
stalagmites from below.
McCloskey’s position is that capitalism releases a more benevolent form of
domination (see also Heilbroner, 1985) than formerly available, and that this rests on moral
principles that come to be acted out in the economy and its institutions. She cites Weber’s
much earlier proposition that business executives require clarity of vision and the ability to
act, but it is only by virtue of their developing ethical qualities that they can command the
11
confidence and cooperation of both workers and customers, and that economic productivity
can be fully released. Such ethical quality is expressed through senior executive beliefs and
action, and cannot exist otherwise. Efficient markets and legitimacy by virtuous conduct are
reciprocal. Half of this equation is not to be ignored.
We do not propose that these key actors are the most powerful figures in the society
as a whole, because that structure is too complex for such simplicity. And societies vary
greatly in their political economies. Some business systems may give prior influence to
government, as historically did Japan, and currently China. Some might leave economic
actors as key sources of influence as in the US case. Others might form coalitions of state and
business interests as in South Korea or Germany. Major players in the spheres of politics,
religion, law, security etc. need also to be accounted for. But we do contend that in shaping
the economy itself, those actors, along with their rationales, responsible for the survival of its
organizations – depending always on the degree of freedom accorded them – will be crucial
as influences.
RESEARCH AGENDA
The above discussion suggests that executive rationale may represent an important
institutional logic in the development of societally indigenous modes of management. Indeed,
in exploring societal progress and economic growth from the origins of the Industrial
Revolution to the more recent success stories of Asia, McCloskey (2010) has argued these
developments “depended more on ideas than on economics” (2010: 25). Economic and
societal growth has required a balanced coinciding of the ideal and the material. For that to
work, the ideal3 needed to be actively playing its part; not as a residual, but as part of the core
explanation.
The ideal as we see it includes the framing and sharing of a set of reasons for doing
things. In essence this means a set of accepted reasons why the firm exists, a set of beliefs
about how a society ought to be ordered, and a set of reasons for treating employees,
customers and trading partners in a certain way. Stated grandly but still realistically when you
consider its effects: a shared philosophy of executive action and responsibility appropriate to
a certain environment at a certain time.
This suggests that progress towards constructing indigenous theories of management
would benefit from the following focuses:
1. Understanding more completely the various aspects of rationale. The origins of such
beliefs are little understood except in broad and speculative terms. So too is there little
knowledge of the sources of their legitimacy as drivers of behavior. There may well
be other features of mindsets that are little acknowledged so far, for example
secretiveness. And there may be an elasticity so far undisclosed implied in the
adherence in some societies to religious ideals. What we need to find out to enhance
our understanding of the varied societal systems is the way that indigenous executive
rationale contributes to the wider causal configurations. An agenda of enquiries could
be:
(a)
In what terms do executives think about the shaping of the organization
towards its future existence? How do these features become prioritized?
(b)
In what terms do human resources come to be best employed for the health of
the organization?
(c)
In what terms does finance come to be best employed in the organization?
(d)
How best should relations needed within an industry be managed?
3
In this context the word “ideal” refers not to some normative concept, but more broadly to
the world of ideas, concepts, abstracts.
12
(e)
(f)
How best should relations needed with government be managed?
In what terms does the control of predictable organizational behavior come to
be managed?
(g)
How is the organization’s external environment seen and understood and
related to? This would acknowledge the existence of constraints on executive
discretion that come from the surrounding sources of influence.
(h)
How do senior executives themselves relate to the wider society?
(i)
Are there preferred principles applicable in the workings of the wider society
that would benefit the organization? Perhaps ancient wisdom?
2. We have proposed configurations as a mode of making research sense of findings
about shared idea-sets. Although we have not argued the detail in this paper it is
necessary to add the feature of “complementarities,” discussed elsewhere (e.g.,
Redding, 2005; Redding & Witt, 2007) and well entrenched in other social science
accounts. Complementarities occur when features either within or across
configurations support and reinforce each other. As they make any feature stronger,
they also make it possibly less able to adapt, given the reciprocal ties. An example
would be fluidity in a labor market being complementary to fluidity in a capital
market. Such complementarities might well stretch across multiple linkages as
systems adjust towards stable order, seemingly often spontaneously.
3. There is a need to study how organizations adapt to the rationales of their leadership,
and to test the assumptions of stimulus and response that are implicit.
4. There is a need to study performance outcomes to test the underlying assumption that
an adapted organizational system has sought to enhance its survival capacity, in which
case it should be more competitive if successfully adapted.
5. With these notions lies a further important idea: that of the legitimacy of the firm in
its societal setting. As societies become more open and more intensively active, there
is a strong tendency for the power of choice to accrete at lower levels and more
widely. Customers accumulate discretion over whether to purchase. Staff accumulate
discretion over whether to remain with the firm. We speak here of historical shifts.
But their import is that the running of organizations depends more and more on
managing the firm’s reputation for morally decent behavior. If not attended to, the
society’s free members will retaliate by not buying their product or not wanting to
work for them. This is the nature of the bourgeois revolution universally (McCloskey,
2010) and of the first Industrial Revolution specifically (Mokyr; Weber, 1930). This
is why Heilbroner (1985) explained the success of capitalism historically as based on
the invention of a more benevolent form of domination than any that had preceded.
We do not know how this will play out in countries like China, as we have few data
on the key variables, but indications exist of severe challenges in the repairing of the
moral order and in the distributing of power (Feldman, 2013; Lemos, 2012;
McGregor, 2012). It would help to have a picture of how the key executive actors see
this slow evolution.
Researching such phenomena requires attention to certain methodological challenges. First, it
is useful to adopt a view of a society’s business system as a complex adaptive system. This
entails seeing it not as an outcome of any small group of main determinants, but as a
functioning whole with many interacting parts. Following Ragin (1987), the aim of the
exercise is the comparison of the wholes. It is therefore necessary and possible to analyze
such wholes – even though complex – using a set of core components of universal
applicability. This is no different from how the medical world understands the human body as
a set of interacting subsystems – blood circulation, central nervous, digestion, reproduction,
psychological etc. Examples of such analysis for the business systems of Asia and elsewhere
13
are visible in Redding and Witt (2007) and Witt and Redding (2014a).
Second, research into the mental worlds of others needs to pay respect to the
ethnographic principle so widely embraced in anthropology. This means allowing the
categories of description to remain expressed in the terms and categories used by the subjects,
not those of the researcher.
Third, the process of determinacy behind the particular research method used needs to
acknowledge the complexity assumed at the start as an essential component of the object of
study. This means that single or dominant causes are likely to be weak predictors. The
naivety of assuming them reduces the ability to understand fully the totality (McCloskey,
2010; Ostrom, 1990; Whitley, 1999b). Instead the search is for the configurations of elements
that are reciprocally connected, complex but still able to be described.
And fourth, it is entirely possible that a meta feature exists – as it were – above the
systems being analyzed. There are alternative cognitions that shape understanding itself in
ways that inhibit a unified picture (Li, 2012a; Nakamura, 1964; Nisbett, 2004), or at least that
add a need for subtle interfacing between mental worlds.
CONCLUSION
In this paper, we have examined the potential for making progress in our understanding of
indigenous management theories through the exploration of executive rationale. This in our
view represents a higher-order enabling mechanism guiding managerial action and fostering
strategies, structures, and formal integration mechanisms – in other words, it represents the
shared mental blueprint of senior executives for running their firms.
We have illustrated variance in executive rationale across five major economies, and
we have suggested, empirically and theoretically, that action and structures in these
economies are broadly aligned with the respective expressions of executive rationale. We
thus propose that if progress is to be made in the understanding of indigenous theories of
management, the process needs to begin by accepting the presence of alternative structures of
sense-making, both societal and organizational. The task of reaching such understanding is
stimulated increasingly now by the clear societal contrasts visible in many modes of
organizing, and by the capacity of alternative organizational forms to perform well in global
markets (e.g., Hall & Soskice, 2001; Whitley, 1999a; Witt & Redding, 2014a). We still have
little understanding of the fact we propose and defend here, namely that such forms reflect
alternative reasonings behind economic behavior. The research focus for attaining such
understanding needs to be more ethnographic and less reliant on what seems to many
observers as a “normal” science, but which has become somewhat too doctrinaire than it
needs to be for this adventurous terrain. We do not present a candidate to replace the normal,
but rather an accompanying reminder of certain epistemological verities that are ignored at
the peril of both theorists and practitioners.
14
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18
Table 1. Summary of Results
Germany
Objective of the firm
the firm exists to
produce needed
goods and services
for society, with
proceeds used to take
care of the various
stakeholders, esp.
employees and
shareholders
Salient elements in shareholders
rationale
(descending order of employees,
salience)
production
society
Hong Kong
the firm exists to
make the owning
family rich and buy
them status
Japan
the firm fulfills a
societal mandate by
taking care of its
employees
Korea
the firm exists to
produce profits,
which are used to
make the controlling
families rich while
buying the
acquiescence of
society and
employees
USA
the firm exists to
produce shareholder
value, other
stakeholders are
secondary constraints
charity, family
wealth, shareholders
employees, society,
status
society
employees, profits
shareholders
employees
charity, shareholders
employees
shareholders
society
customers, profits
production,
stakeholders in
general
development
customers,
society/community
production
employment
repudiating
shareholder value
serving employees
serving shareholders
profits
Key themes
productionism
balancing
stakeholders
business by the
family for the family
low interdependence
with employees
appeasing society
shareholder value
Figure 1. A Configuration of Features with the “Workshop of the World” System,
Linking Executive Rationale with Its Context and Cultural Origins
APPENDIX A. INTERVIEWEES
Germany
• Dr. Uwe-Ernst Bufe, former CEO, Degussa
• Leonhard H. Fischer, management board member, Allianz & Dresdner Bank
• Peter Fischl, CFO, Infineon
• Dr. Carl Hahn, former CEO, VW
• Dr. Wolf Klinz, former CEO, AGIV; President, Chamber of Commerce and Industry,
Frankfurt (Main)
• Hilmar Kopper, former CEO, Deutsche Bank
• Dr. Dietmar Kuhnt, CEO, RWE
• Dr. Ulrich Middelmann, Vice-CEO, ThyssenKrupp
• Dr. Werner Schmidt, former CFO, VW
• Dr. Ronaldo Schmitz, former management board member, Deutsche Bank
• Dr. Harald Schröder, former Vice CEO, Merck
• Dr. Henning Schulte-Noelle, CEO, Allianz
• Dr. Heinrich v. Pierer, CEO, Siemens
• Kurt F. Viermetz, Chairman Supervisory Board, HypoVereinsbank
• Dr. Herbert Wörner, former management board member, Bosch; former CEO, Bosch
Siemens Haushaltsgeraete
• Dr. Jürgen Zech, former CEO, Gerling
• Anonymous, CEO, one of Germany's 30 largest public firms
Hong Kong:
• Ronnie Chan, President & CEO, Hang Lung
• Philip Chen, Director & COO, Cathay Pacific
• Paul Chow, CEO, Hong Kong Stock Exchange
• Roger King, Board Member, Orient Overseas (Int.)
• Peter T. C. Lee, Chairman, Hysan
• Michael K. H. Leung, Managing Director, Peoples Telephone
• Sir Dr. David Li, Chairman & CEO, Bank of East Asia
• Dr. Helmut Sohmen, Chairman & President, World-Wide Shipping Group
• Sir Gordon Wu, Chairman, Hopewell Holdings
• William Ho, Managing Director, Growth Investments
Japan
•
•
•
•
•
•
•
•
•
•
•
•
Yoshikazu Hanawa, Chairman, Nissan
Toru Hashimoto, former Chairman, Fuji Bank
Terukazu Inoue, Special Auditor, Toyota
Takeo Inokuchi, Chairman & President, Mitsui Sumitomo Insurance
Masami Ito, President, Ito Ham
Tetsuro Kawakami, former Chairman, Sumitomo Electric
Yorihiko Kojima, Senior Executive Vice-President, Mitsubishi Corp.
Akira Uehara, President, Taisho Seiyaku
Kaneichi Maehara, former board member, Sumitomo Life Insurance, Chairman,
Sumitomo Life Research Institute
Minoru Makihara, Chairman, Mitsubishi Corp.
Hiroshi Nagata, Executive Vice-President & board member, Mitsui & Co.
Taizo Nishimuro, Chairman, Toshiba
21
•
•
•
•
•
Akira Nishikawa, President & CEO, Mitsubishi Materials
Koichi Ohmuro, Senior Managing Director & Senior Executive Officer, Mitsui
Fudosan
Masahiro Sakane, President, Komatsu Machinery
Teruo Shimamura, President & COO, Nikon
Yasuhiko Watanabe, former board member, Bank of Tokyo Mitsubishi, Senior
Managing Director, Mitsubishi Estate
South Korea:
• Moon-Seok Kang, President & CEO, Dong-A Pharmaceutical
• Dr. Shin Ho Kang, Chairman, Dong-A Pharmaceutical
• Dr. Dong-Jin Kim, President & CEO, Hyundai Motor
• Dong Yun Kim, Vice Chairman and CEO, Telson
• Dr. Joon Kim, Senior Managing Director, Kyungbang
• Milton S. Kim, Chairman, IT’S TV
• Syng J. Kim, Vice Chairman & CEO, SK Global
• Yongsung Kim, CEO, Neoplux Capital
• Dr. Chong S. Lee, Executive Vice President, LG Card
• Soo Young Lee, Chairman, DC Chemical
• Dr. Y. T. Lee, Chairman, TriGem Computer
• Yoon-Woo Lee, President & CEO, Samsung Electronics
• Chong Y. Pae, President & CEO, Samsung Corporation
• Yong Sung Park, Chairman, Doosan Heavy Industries & Construction
• Minsok Suh, Chairman & CEO, Dong-Il Corporation
United States
• Michael Alexander, former Managing Director, FASB, former Executive Partner,
Touche Ross International
• Robert M. Baylis, former Vice-Chairman, CSFB
• Donald W. Blair, CFO & Vice President, Nike
• J. Frank Brown, former Global Advisory Services Leader, PricewaterhouseCoopers
• Doug Elix, Senior Vice-President & Group Executive Sales and Distribution, IBM
• Jon T. Elsasser, Director Corporate Relations, Timken
• Richard Goodman, CFO, PepsiCo
• Robert J. Herbold, former COO, Microsoft
• Arnold G. Langbo, former CEO & Chairman, Kellogg’s
• James A. Lawrence, Vice Chairman & CFO, General Mills
• Victor J. Menezes, Senior Vice-Chairman, Citigroup
• Leo F. Mullin, former CEO, Delta Airlines
• Mike A. Neal, Vice-Chairman, GE, Chairman, GE Capital Services
• Joseph L. Rice, III, Senior Partner, Clayton Dubilier & Rice
22
APPENDIX B: DATA, METHODS, AND DETAILED RESULTS
(This appendix is available as supplementary material on the MOR website)
Geographic Setting
We explored executive rationale in five geographic settings: Germany, Hong Kong, Japan,
South Korea (hereafter “Korea”), and the United States. The US is the origin of most
business and management research and theory, while Germany is the primary exponent of an
alternative Western way of structuring an economy (cf. Hall & Soskice, 2001). The Asian
contexts were chosen as representing the three major Asian business systems identified in
prior research: Chinese private business, Japanese business, and Korean business (Whitley,
1992, 1999). Of these, the latter two are territorially bound, while the former spreads across
East Asia. While we make no claim to present a representative picture of private Chinese
business throughout Asia, prior evidence suggests a shared mindset among ethnic Chinese
businesses in the region (Redding, 1990) exerting strong influence on private business in the
People’s Republic (Ralston et al., 2006; Redding & Witt, 2007).
Data Collection
We collected our data through interviews of current or recently-retired senior management
members of major local firms. The interviews took place in 2002 and 2003 in Asia and
Germany and between 2004 and 2007 in the United States. We interviewed 74 executives in
total: 17 in Germany, 10 in Hong Kong, 17 in Japan, 15 in South Korea, and 14 in the United
States (Appendix A).
Access to interviewees was based on existing relationships and third-party
introductions. As common for research in this vein, our sample is thus not random. We used
multiple introductions from mutually-independent sources to minimize sampling bias, and
our analytical method for identifying the main elements of rationale (described below) is
robust against outlier opinions.
Our general approach followed Redding (1990), using semi-structured in-depth
interviews. The interview schedule comprised a range of questions designed to elucidate
views of why firms exist and what the ideal institutional structure of an economy might look
like. This paper focuses on the former.
Except for four phone interviews of US executives, all interviews were conducted
face-to-face. Average interview duration was slightly under one hour per executive in Asia,
and 45 minutes in the US. All interviews in Germany were in German, and all interviews in
Japan except one (by interviewee choice) were in Japanese. All other interviews were in
English.
Data Analysis
Following Redding (1990) and Witt and Redding (2009), we determined the core elements of
the rationales expressed, using exploratory content analysis. Working with verbatim
transcriptions of the interviews in the respective original language, we identified all relevant
propositions, i.e., statements of why the firm exists. Given the idiographic nature of this study,
we did not base our analysis on pre-determined coding categories, but let interview contents
define them (Altheide, 1987; Krippendorff, 2004; Redding, 1990).
To each meaningful statement thus identified, we assigned a value from -3 to +3,
following the scheme summarized in Table 1. This enables us to obtain an overall measure of
affect – support or rejection – of each category by calculating the mean across all statements
thus coded.
*** Table 1 about here ***
23
We verified the reliability of coding with the help of referees and appropriate
statistical tools. We gave research assistants without prior project involvement a list of
coding categories and a one-hour explanation of the process and let them code randomlychosen segments amounting to 5 percent of transcriptions for the given country. Their
agreement with our coding was 90.0 percent for Hong Kong (expected by chance alone: 22.8
percent), 86.4 percent (8.0 percent) for Japan, 87.9 percent (20.8 percent) for Korea, and 90.5
percent (23.1 percent) for the US. Cohen’s kappa, a measure of intercoder agreement (Cohen,
1960), was 0.87 for Hong Kong, 0.85 for Japan, 0.85 for Korea, and 0.88 for the US, well
above the strictest threshold (0.75 to 0.80) specified by methodologists (Banerjee, Capozzoli,
McSweeney, & Sinha, 1999; Popping, 1988).
Our final analysis identified core elements of rationale by salience, measured by the
number of interviewees discussing a given category. To ensure broader validity of results and
exclude outlier opinions, a category must be mentioned by at least half of the interviewees
(for odd-numbered sample sizes, (N-1)/2 of interviewees) to be included. We further
explored outlier opinions for hints at emerging trends. Consistent with the research objective
of capturing the dominant modes of thinking among the current dominant coalition of
mainstream firms, we did not find any clear indications of emerging trends. However, we did
find shadows of the past in the thinking of especially the older executives in the same, and
where these are significant, we mention them in the findings below.
For ease of presentation, we prepared graphical representations of our findings
(introduced below). In these, circle size expresses salience, and circle shading, affect. The
bigger the circle, the higher the salience, and the lighter the shading, the more positive the
affect. For each element, we indicated the numerical values of salience as a percentage of the
total sample as well as that of average affect. Lines between elements denote conceptual
linkages drawn by the interviewees. Where several related elements are linked, we have
encompassed them in thick ovals to reduce clutter. A line between an individual element
outside an oval to an individual element inside it suggests a connection between these two
elements only. A line between an individual element outside an oval and the oval itself, by
contrast, indicates a connection between the outside element and all elements inside the oval.
We follow standard ethnographic practice and retain expression as close to the original as
possible, regardless of grammatical or stylistic correctness (cf. Witt & Redding, 2009).
Germany
Key elements in German rationale were shareholders, production, employees, society, and
profits (Figure 1).
*** Insert Figure 1 about here ***
Most German executives tended to regard productive functions as the firm's key
reason for existence. Indeed, 53 percent of interviewees began with reference to production.
The most proximate beneficiary of the provision of goods and services was seen society at
large, with some intersection with the notion of providing for customers’ needs. Accordingly,
a common theme across all industries was the meeting of basic societal needs and market
demand:
“Our firm is an undertaking that has dedicated itself to the provision of basic
needs.”
Executives from finance and other industries providing fundamental goods or services
particularly stressed their firms' contribution to enabling economic activity. Other executives,
especially those from other industries, emphasized facilitating life as we know it and
propelling social progress through innovation.
Inherent in many propositions with this theme was a sense that firm activities and
survival were not discretionary, but “a duty to provide to the market.”
24
About one-third of interviewees began by discussing benefits for the firm's various
stakeholders. While the productionist view noted earlier stresses the provision of goods and
services, the stakeholder view focuses on who shares the economic surplus created by the
firm. The complementary nature of these views is evident in the fact that most interviewees
opening with one theme subsequently referred to the other as well. For example, having
emphasized the importance of his firm in providing services to society, one executive
continued:
“For whom does [the firm] do this? It does this for its shareholders, it does
this for its employees, I have already talked about the customers, and in that it
at the same time fulfills a social task.”
Both themes thus coexisted in the minds of most interviewees, though variation in the order
in which executives evoke them suggests a difference in salience for unknown reasons.
Shareholders were both the most salient and least loved stakeholder. No executives
favored pursuing shareholder value. Most never mentioned it, and when the topic was
discussed, interviewees were typically diffident:
“I consider an exclusive focus on shareholder value, however one defines it,
highly questionable. “
The rejection of shareholder value does not imply that shareholders did not matter. Most
recognized shareholders’ right to a return:
“We have [a large number of] shareholders, and they are the owners of the
firm, and we have to generate a decent return for them.”
What rejecting shareholder priority does imply is that the interests of financial capital did not
supersede those of other stakeholders.
Eighty-two percent of executives mentioned employees. Their emphasis was on the
firm's role in creating and maintaining employment, seen as a dual obligation toward society
and employees:
“We have of course at the same time the duty, and we also understand it that
way, accordingly to employ people in a reasonable environment.”
In addition to providing employees with a livelihood, some suggested a desire to help
employees pursue personal fulfillment and self-development.
Seventy-one percent identified society as a stakeholder. No dominant themes emerged,
with the discussion ranging from topics such as corporate citizenship and sustainability to
philanthropy, taxes, and employment provision. To the extent that they offered a stakeholder
rank order, none put society first – though accepted as primary beneficiary of the provision of
goods and services, society seemed to be a subordinate beneficiary vis-a-vis the distribution
of surplus.
There was widespread recognition among interviewees of the legitimate claims of all
stakeholders as well as of complex interdependencies:
“If you have no employees, you have no firm.”
“People are not the abstract capital of the dividend. They are supposed to
serve their firm so that people in the firm flourish, and in order for them to
flourish, capital has to increase to the maximum extent and has to be served
properly, just as I cannot kill my suppliers.”
Not only did most executives avoid ranking stakeholders, some rejected even the possibility
of a ranking, arguing that “prioritization actually leads into an intellectual dead-end.” Those
who did refer to rank order offered views that varied across interviewees, some even
changing their rankings during interview.
A final element in German executive rationale was profits. There was wide consensus
that for a firm to serve its various stakeholders, it must generate profits:
“Jobs and everything need to be paid for. That is, the firm needs to be
25
profitable. And that is something that this firm owes to society: to deliver
money.”
Intriguingly, most of this discussion occurred without reference to customers, to whom only 7
(41%) executives referred.
Hong Kong
Key elements in Hong Kong rationale were family wealth and charity, shareholders and
society, and employees and status (Figure 2).
*** Figure 2 about here ***
Central was the creation of family wealth, emerging as both an initial driving force for
starting a business as well as a continuing motivation through the generations:
“[For] most of the business enterprises in the society, creating wealth for
themselves… their family members would probably be the initial driving
force.”
Family wealth, in turn, was conceptually linked to shareholders. Sixty percent of the
executives referred to this element, a surprisingly small number given the recent prominence
of shareholders and shareholder value in international corporate discourse. Some statements
were consistent with a focus on shareholders or at least their acceptance as a key stakeholder:
“Very simple, [the rationale is to] create shareholder value.”
Some shareholders – specifically, families holding a controlling stake – seem to matter more
than others:
“Hong Kong families, many of them, they don’t treat minority shareholders
that well… Some of these, you know, even very big companies’ stocks never
performed because of that in Hong Kong. They do business with their own
family companies.”
Closely connected with the generation of family wealth was social status. Queried
about forces driving him to generate wealth, one owner quipped:
“My incentive is very simple: I have an expensive wife.”
While this may seem a joke, the ability to sustain a wife with expensive spending habits — a
“taitai” (“madam”) — is a public signal of financial success and thus a status symbol, similar
to the Western “trophy wife”. Other interviewees made the linkage between family wealth
and status more directly:
“Rich without recognition in the Chinese sense is less desirable.”
Status was further linked to being a controlling shareholder:
“control is recognition, equals recognition. So if you walk down the street and
your name is affiliated with a successful firm, Chinese in fact will say, oh,
here is the boss. You know, doesn’t matter whether you are physically
operating the business or not. Right? Here’s the boss. You know, and
everybody will call you by the name boss.”
The same executive continued to explain that many families refused to cede control over their
businesses because it was “very, very important for [the owner] to walk around in his
business and everyone calls him boss. You see. So I don’t [think] they would ever sell the
business.” This suggests that one function of employees is to provide status.
Further linked to family wealth was charity, seen as a noble but subordinate objective
to be pursued once wealth had been attained:
“The firm is to invest the minimum and make a lot of money. After I make a
lot of money, then I think social work is one of the ways I spend my money.”
Accordingly, charitable engagement was described as being in its early days in Hong Kong.
Inherent in charity is a notion of social contribution, a linkage evident in statements
like this:
26
“The possibility to use wealth, to use the creation of wealth to engage in
philanthropy, not only to have it for one’s own purposes or to work toward
family goals, but also to try to have sufficient savings and income that makes
it possible to support society.”
There seemed to be a threshold effect linking societal concern to attainment of family wealth:
“Once they reach to a certain stage, probably they will be begin to think
beyond creating wealth or to the stage that wealth is sufficient enough that
they don’t have to worry about then they will cross to the next level of…
contributing back to the society.”
In addition, social contributions were seen as a means toward attaining status.
Half the executives mentioned employees, with the lowest affect of all elements.
Though identified as a stakeholder, employees were neither well integrated into the mental
landscape nor discussed in depth. The linkage with society was evident in statements such as
the following:
“In social responsibility, I think that the companies in Hong Kong, this
company anyway, is responsible to its employees.”
Accordingly, a number of executives emphasized the importance of employees, one referring
to them as “most important to us” and others mentioning them as a key stakeholder alongside
shareholders. At the same time, comments suggested relatively limited interdependence
between corporate leaders and employees. For instance, one executive pointed out the
importance of giving employees bonuses and further incentives because “in our business,
normally our professionals, they always move from one company to another.” Another
suggested that the reason Hong Kong firms preferred labor-intensive to capital-intensive
activities was that it was easier to lay off staff than to sell equipment.
Japan
Key elements of Japanese rationale were society, employees, shareholders, profits, customers,
production and stakeholders (Figure 3). Society, employees, shareholders, customers and
stakeholders are inter-linked and thus enclosed within a large oval.
*** Insert Figure 3 about here ***
Most Japanese executives regarded stakeholder value as the key rationale. Indeed,
half used the word “stakeholders” explicitly, making Japan the only economy here to include
stakeholders in their totality as a category. Executives tended to underline that all
stakeholders were important:
“I think in a way that the [the firm exists] for the purpose of all stakeholders.”
This emphasis on all stakeholders was a repudiation of pressure to focus on shareholder
interests. In the words of an executive from a major manufacturer:
“Not like that American-style ‘shareholder only,’ not that way of doing things,
but managers have after all a responsibility toward all stakeholders.”
In terms of specific stakeholder categories, executives tended to stress the importance of
society, employees, shareholders, and customers.
Most salient among stakeholders was society at large. Validating the firm's activities
in the eyes of society was perceived as more important than business success:
“For a manager, the most important thing is not to improve the business
results during one’s time. Rather, I think it is extremely important that when
one passes [things] on to the next manager, to what extent the firm is one
whose shape is accepted by society and that one can ensure the permanence of
the firm.”
Executives tended to attach similar salience and affect to their employees, with 82
percent of interviewees identifying employees’ well-being as an objective. A focus of
27
attention in terms of firms’ contribution to employees was remuneration, with attendant
benefits for living standards and family stability:
“I think when you pay the employee, the standard of living of the employee
goes up … first you have to distribute the part that the worker leads a life in
which he can to some extent be content.”
In addition, several executives touched on the theme of the firm as a place of self-fulfillment,
where employees could find “self-satisfaction” and develop their personalities and interests.
The emphasis on existing employees contrasted with a limited stress on the creation of
employment. Executives perceived a sense of duty towards existing employees, less so to
creating new jobs.
Shareholders were less enthusiastically included as stakeholders, seen apparently as a
necessary evil. For instance, having emphasized the importance of employees, one executive
continued:
“However, if you make light of shareholders and the firm as a consequence
goes under, that is it. That is why we pay dividends to shareholders, within
tolerable bounds. After all, this is the shareholder era.”
To the extent executives discussed shareholder value, they tended to denounce it:
“Shareholder value, well, doing things like increase performance at that time,
and that the managers should get more, well, I believe that this is rather
dangerous.”
There was also no sense that shareholders have the right to determine company fate. One
executive used the analogy of the relationship between parents (shareholders) and children
(companies). While parents had a right to expect gratitude (dividends) from their children,
they had no right to control how their children led their lives.
Customers constituted the least salient group of stakeholders, with 59 percent of
executives referring to them with high positive affect. Providing value and even enjoyment
through goods and services emerged as central theme in this category:
“It is our basic spirit to do work that is useful for the customer by making
perfect products.”
Implied, and in most cases expressed, was a positive view of production and service
provision in themselves (represented in the figure as “production”), though executives did not
elaborate further.
While executives saw clear linkage between customers and profits, they tended to
emphasize that customers had priority over profits. In this view, profits follow naturally if
firms serve customers well:
“You do not start with [the idea of] making profits, you offer the customer the
best product.”
Some executives also identified the delivery of good products to customers as one way of
serving society.
A majority of interviewees regarded profits as important, though not as an end in
itself, but as an enabler of firm survival and the pursuit of benefits for stakeholders, as
previously discussed:
“We offer a useful [product] to society and the customer. In return, we make a
profit. Because there is a profit, we can employ our employees, and we can
offer various useful [products] to society.”
However, there were important qualifications. One, as already mentioned, was that customer
satisfaction came before profits. In addition, while affirming the importance of profit as such,
they tended to reject profit as main or sole objective:
“Well, contribution to society is also our work. If we just do [business] saying
all is fine as long as we make money, things get strange.”
28
Similarly, a number of executives spoke out against a focus on short-term profits and
maintained that firms should resist the temptation of taking “easy profits” without providing
genuine value to customers.
Korea
Key elements of Korean rationale were profits, employees, shareholders, charity,
society/community, and development (Figure 4).
*** Figure 4 about here ***
Central was the generation of profits, emphasized by 80 percent of executives with
statements that tended to be short and categorical:
“I think the most important thing, of course, is to make money. Otherwise
there is no need. A firm losing money is kind of crime and mak[ing] money
[is] very important, firms must be going concern[s].”
This emphasis on profits seems linked to the 1997/8 Asian financial crisis, during which a
number of large Korean companies went bankrupt; a highly salient two-thirds of executives
referred to this experience.
The centrality of profit naturally leads to the question, for whose benefit? Eleven
executives suggested shareholders. Some endorsed shareholder value, likewise a reaction to
experience of the financial crisis, but most seemed to espouse a form of stakeholder-value
view in which shareholders’ interests were just one, and not necessarily the most important,
component:
“Obviously first and foremost objective is to try to generate profit for the
stakeholders, not only for the shareholders, but also all the employees,
stakeholders.”
Underlying this ambivalence seemed to be a sense that the relentless pursuit of shareholder
value was self-limiting and thus in need of balancing:
“if you really minimize expense, then shareholder value is maximized. But
can you do that continuously? So in order to maximize shareholder value
continuously in the long run we have to be balanced.”
Accordingly, several executives expressed the desire to run their business in the “spirit of a
family” and as one “combining incentives and all the hard driving factors that drive a typical
company in the West [i.e., the United States]” with “more feel to it so that the employees feel
like they are in a very friendly organization.”
This perceived need for balance provided a conceptual linkage to a second
stakeholder group, employees. Some saw employee relations in instrumental terms, such as
shareholders’ interests:
“As our employees work hard, they make more profit and as a result more
dividend and we can pay more tax. Our priority should be the closest one to us,
which is our employees.”
However, a majority stressed the importance of employees as an end in their own right for
whose benefit profit is made, rather than as a means toward generating shareholder returns:
“[The rationale is] the pursuit of happiness by giving satisfaction to a)
employees, executives and all working for the company, b) customers and
other stakeholders.”
Society emerged as a third major stakeholder in the Korean executive mindscape,
with 67 percent touching on this topic. Some merely identified a generic obligation to be a
good corporate citizen – “industry must be a good citizen for society.” Others were more
specific, identifying various means of meeting their felt obligations to society:
“We have to return the profit, some of the profit back to society.”
“We have to leave something in society. So we created a big foundation.”
29
These statements imply two connections with other elements in Korean rationale: of profits
as enablers and of charity as a means of societal contribution.
Seventy-three percent of executives discussed charity. The general consensus was on
making donations to good causes:
“So once the corporation makes money, they try to contribute to society. Like
the welfare foundation. They support the cultural activity, the music, dance,
performance, live performance, and the social activity, the health care center,
the hospital.”
In addition, contributing to national development emerged as a further aspect of
societal contribution. A major theme in this discussion was that firms exist not only to
generate wealth, but also to promote national interests by aiding Korean economic
development:
“I always wanted to see Korea is maintaining the leading edge of industry.”
“Still we are low level of income and concerning the international standard, or
some investors’, so we are still eager to focus on the economic growth,
development.”
With one exception, interviewees emphasizing this category tended to be older, suggesting
that this perception of rationale will disappear over time.
United States
Key elements of US rationale were shareholders, employees, customers, society/community,
production, and employment (Figure 5). Society, employees, and customers are stakeholders
that are mutually linked; we thus enclosed them within a large oval. The shareholder category
could in principle also be included in this oval, but given its dominance over the other
stakeholder categories and the tendency of US executives to juxtapose shareholders with
other stakeholders, we left it standing alone .
*** Insert Figure 5 about here ***
Shareholders were by far the most salient element in US rationale, affirmed by
numerous short unambiguous statements:
“[The reason for the existence of the firm] is to create value for the investors,
for the shareholders of the company.”
“[The reason,] it’s shareholder return.”
Executives accordingly tended to regard other stakeholder interests as secondary, usually in
relation to their instrumental value toward creating shareholder value:
“The primary objective being a shareholder objective, leads some secondary
objectives which are all about, you know, satisfying products, happy
customers, a community that use them as a reasonable participant in the
community.”
Slightly more than half the interviewees referred to production of goods and services.
Most saw production as a means toward the end of serving shareholders. As one executive
summarized,
“The number-one objective, I believe, is to serve the group of people who
have bought into the idea of ‘let’s have a company to provide these kinds of
products in order to have a financial gain for us the shareholders.’”
However, several executives, while acknowledging the importance of shareholders as a
constituency, considered productive activity their core mission: e.g., “to provide an essential
product or service that is either needed or desired by the population, the customer base to be
served.” Executives emphasizing the production of goods and services tended to be relatively
senior, and perhaps more reflective of US rationale before shareholder capitalism gained
dominance in the 1980s (cf. Fligstein, 2001).
30
Conceptually, production, with concomitant innovation, was regarded as a social
benefit:
“Society at large will be benefited by new things, or new services, new
luxuries being provided, or existing things being provided at a lower price.”
Next to shareholders, interviewees identified three salient groups of stakeholders:
employees, society/community, and customers. There was a clear sense that employees are a
less important constituency than shareholders:
“If you really had to put a rank on them, you would put the community and
the employees at a lower but important priority.”
While “historically, the firm also existed for the benefit of our employees,” our interviewees
seemed to view employees primarily as means towards other ends, as well as a potential
constraint:
“You can’t just do anything in order to increase shareholder value, if it’s sort
of hurting your employees. Because ultimately if you are hurting your
employees, or at the expense of your employees, you are not going to create a
lot of shareholder value.”
In order to secure the requisite degree of cooperation from employees, “companies need to
make sure their employees are being appropriately paid.”
Seventy-one percent of executives mentioned society/community. Some saw
society/community as a beneficiary of firm activity, claiming that “by all that profit-seeking,
we end up with something much better for society” or pointing to the social value of
providing goods and services. Most, however, identified society/community as a constituency
“to be very conscious of, as long as there is some benefit to the bottom line” and thus a check
on the primary objective of the firm, shareholder value:
“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.”
Half the executives cited employment provision as a contribution:
“I mean you are generating jobs. I mean, if you think of it, maybe the biggest
contribution at the end of the day, other than the products themselves, is
generating jobs.”
Corporate social responsibility (CSR), by contrast, was mentioned by only 14 percent
of US executives.
Executives further recognized customers as stakeholders. As already evident from
earlier quotations, most asserted that shareholder interests supersede those of customers, who
seemed to be a means toward profits:
“You certainly want to satisfy your customers. But I don’t believe you want to
satisfy your customers in and of itself, you want to satisfy your customers
because that is what you have to do to make a profit from your customers.”
In this context, profits took precedence over customers; otherwise, “new owners will come in
and they will say, we will give less to the customers, because you are giving stuff to the
customers that isn’t getting paid for.”
31
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Witt, M. A. & Redding, G. 2009. Culture, meaning, and institutions: Executive rationale in
Germany and Japan. Journal of International Business Studies, 40(5): 859-885.
32
Table 1. Coding Scheme for Affect
Value
Meaning
+3
affirmation
through
action
+2
affirmation
+1
tentative affirmation
0
neither affirmation nor
rejection
-1
tentative rejection
-2
-3
rejection
rejection through action
Example
“We have increased our shareholder value by 50%”
“Shareholder value is important”
“It seems to me that shareholder value is important”
“I have no opinion on shareholder value”
“It seems to me that shareholder value is
dangerous”
“Shareholder value destroys the firm”
“We have trained our staff not to think about
shareholder value”
33
Figure 1. Executive Rationale, Germany
Society
(71%, +1.8)
Production
(82%, +1.9)
Profit
(65%, +1.9)
Shareholders
(88%, +0.8)
Employees
(82%, +1.7)
34
Figure 2. Executive Rationale, Hong Kong
Status
(50%,
+1.9)
Family
wealth
(60%, +1.8)
Employees
(50%,
+1.5)
Shareholders
(60%, +1.6)
Society
(50%,
+2.1)
Charity
(60%, +2.0)
35
Figure 3. Executive Rationale, Japan
Production
(47%,
+2.0)
Profit
(59%, +1.8)
Customers
(59%, +1.9)
Society
(88%, +1.8)
Employees
(82%, +1.7)
Stakeholders
(47%,
+1.9)
Shareholders
(76%, +1.0)
36
Figure 4. Executive Rationale, South Korea
Profit
(80%, +2.0)
Shareholders
(73%, +1.6)
Employees
(80%, +1.7)
Charity
(73%, +1.9)
Society
(67%, +1.7)
Development
(53%,
+1.8)
37
Figure 5. Executive Rationale, USA
Employment
(50%,
+1.8)
Society/
community
(71%, +1.4)
Shareholders
(93%, +1.8)
Customers
(71%, +1.2)
Production
(57%, +1.8)
Employees
(79%, +1.3)
38