Director: An elected person and along with other directors is responsible for policy making in the company Board of Directors: more than one directors, internal, external to the company ownership and some appointed by agencies working together for one company Globalization: The openness of the world economies that allow free transfer of goods and services and movement of human capital across international boundaries MNCs: Multinational Corporations, companies that have independent operations in several countries in addition to its home country Competition: when two or more individuals or organisation strive to achieve same goal, or better than that of others FII: Foreign Institutional Investors; investment bodies who invest in countries other their own, they do not setup or own any business locally or overseas. FDI: Foreign Direct Investment, investment made by setting up facilities of manufacturing, trading or for service providing in foreign countries, either by tie up with local partner, government or directly setting up of wholly owned enterprise ISO: International Organization for Standardization. An international body engaged in developing standards of technical, industrial and commercial nature. 4.6 LEARNING ACTIVITY 1. Mention two measures that the Board members need to consider to deal with the issues of corporate governance within their organisations. ___________________________________________________________________________ ___________________________________________________________________________ 2. Comment of on some emerging trends in corporate governance, what do Indian companies’ ned to do to match their efforts to be on same track? ___________________________________________________________________________ ___________________________________________________________________________ 4.7 UNIT END QUESTIONS: A. Descriptive Questions Short Questions 1. Define the term Board of Directors. 2. List down the steps the Board take to monitor performance of the executive. 101 CU IDOL SELF LEARNING MATERIAL (SLM)
3. List down five benefits of Globalisation that have led to rise of Corporate Governance. 4. What is Legal Compliance, give some examples. 5. What is succession planning of directors? Long Questions 1. Why it is important for the board to keep on modifying its structure for the proper implementation of corporate governance in the company? 2. How is the role of Independent Directors important to the joint working of the entire board? 3. Discuss how companies can manage to balance confidentiality and obligation of transparency of financial and other important information. 4. Do you think it is correct to for Corporate Governance to be focussed on external issues like environmental sustainability and CSR? 5. Why it is required for Promoters and senior directors to be subject to performance appraisal and accountability, when they are the owners of the company? 6. Why do board members need to be concerned about issues being faced related to Corporate Governance in a company, explain with at least two examples. 7. How important is it for the governments to control the activities of MNCs in local environment, consider any one of the recent actions by Indian government on either WhatsApp, Facebook, MasterCard? 8. Discuss any five changes a government should ensure in the economy structure for foreign companies to operate with ease in the local market? 9. Do you agree that the extra time and effort needed to meet for legal compliances can be better used to meet economic objectives of the company in a much better way, discuss with examples. 10. Taking at least two examples, discuss how emerging trends in Corporate Governance will help companies to improve reputation and improve their attractiveness to investors. B. Multiple Choice Questions 1. The original owners of a company are _________________ a. Directors b. Executive c. Promoters d. CEO 102 CU IDOL SELF LEARNING MATERIAL (SLM)
2. The board is a group who head the ______________________ activity in the company. a. day-to-day operations b. Policy making c. Hiring d. Investment 3. ____________________________ is meeting all obligations under law towards formation and running of the company a. Legal b. Financial compliance c. Disclosure of accounts d. All of these 4. Globalisation is __________________ a. selling products freely in other countries b. reduction of tariffs and duties c. transfer of investment capital among countries d. All of these 5. Maintaining separate roles among board and executive is _______________________ a. Sharing of roles b. Segregation of Responsibilities c. Clash of responsibilities d. Delegation of Responsibilities Answers 1-c, 2-b, 3-a, 4-d, 5-b 4.8REFERENCES Text Books: S.A. Sherlekar, Ethics in Management, Himalaya Publishing House William B. Werther and David B. Chandler, Strategic corporate social responsibility, Sage Publications Inc Robert A.G. Monks and Nell Minow, Corporate governance, John Wiley and Sons 103 CU IDOL SELF LEARNING MATERIAL (SLM)
Reference Books: W.H. Shaw, Business Ethics, Cengage Learning Beeslory, Michel and Evens, Corporate Social Responsibility, Taylor and Francis Philip Kotler and Nancy Lee, Corporate social responsibility: doing the most good for company and your cause, Wiley Subhabrata Bobby Banerjee, Corporate social responsibility: the good, the bad and the ugly, Edward Elgar Publishing Satheesh Kumar, Corporate governance, Oxford University, Press 104 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 5 STRUCTURE AND PROCESS OF 105 CORPORATE GOVERNANCE STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2Theories of corporate governance 5.2.1 The Agency Theory 5.2.2 Stakeholder Theory 5.2.3 Stewardship Theory 5.2.4. Resource Dependency Theory 5.2.5 Political Theory 5.3 Effect of Ethics Theories on Corporate Governance 5.3.1 Theory of Business Ethics 5.3.2 Theory of Virtue Ethics 5.3.3 Closing thoughts on Theories of Corporate Governance 5.4 Features, Structure and Standards which effect corporate governance in India 5.4.1 CII Code of Desirable Corporate Governance (1998) 5.4.2 Kumar Mangalam Birla Committee 5.4.3 Naresh Chandra Committee 5.4.4 N. R. Narayana Murthy Committee 5.5 Structure of Corporate Governance in India 5.5.1 Ministry of Corporate Affairs - MCA 5.5.2 The National Foundation for Corporate Governance 5.5.3 The Securities and Exchange Board of India, SEBI 5.6 Regulations for Corporate Governance 5.6.1 Setup of Audit Committee 5.6.2 Subsidiary Companies 5.6.3 Role of Institutional Investors 5.7 Summary CU IDOL SELF LEARNING MATERIAL (SLM)
5.8 Keywords 5.9 Learning Activity 5.10 Unit End Questions 5.11References 5.0 LEARNING OUTCOMES After studying this unit, you will be able to: Outline the different theories of Corporate Governance Analyse how the role of corporate governance has grown to the benefit of the stakeholders Appreciate the importance that is given to corporate governance by Indian industry associations and the Government Discuss the role of government and independent agencies created to implement corporate governance policies for the Indian industry Recollect the different laws and regulations that have been enacted by the government of India to ensure corporate governance 5.1 INTRODUCTION Corporations operate in a dynamic environment composed of other entities looking for their own benefit and to stay ahead of others. The true spirit of it cannot be purely imposed, as with growing restrictions it is inherent human nature to consider ways and means of evading adherence. Today companies need to build relationships, not only with their investors or the employees but with other external agents as well and the society at a large. This module starts with a section on the theories of corporate governance. Although the modern though in relation to corporations started by late 1980s, the philosophical thinking about good behaviour is as old as civilisation. We present here a selection of theories that reflect the growth of the concept which explores the status of ownership of companies and the subordination of directors and managers to the greater status of the owners. There have been different thoughts of how the true owners should deal with the directors in the role of caretakers of the affairs of the company. Readers will find the arguments presented in this section to be very much relevant to the current understanding about accountability and fairness, as highly sought after aspects from directors and managers alike. The role of directors is not just for managing the affairs but also to build networks among the different partners of business and even with regulatory agencies. In this case the role of government 106 CU IDOL SELF LEARNING MATERIAL (SLM)
agencies in moderating good practices and creating for accountability of business towards other stakeholders is without any doubt a requirement. The current theories on corporate governance approach the topic with singularity. Governance of corporations is wildly deferent due to the industry they exist in, the products they make, the nature of customers they provide service to. Such vast differences in the demand for governance cannot be addressed by theories, yet it will be best to combine the learnings from different theories and apply their understanding to the dynamic nature of business world. Business process today are interwoven with external factors such as socio-cultural, politico- legal and environmental issue in addition to the pure economic effects on their conduct. While there is no doubt about the profit motive of enterprises, the truth about shared resources and environmental sustainability drive governments to lay down policies and process for the corporations. The structure of Indian corporate governance is securely fastened to legislations, independent agencies and recommendations from committees led by industry captains and professionals who have deep experiences in managing the affairs of some of the most reputed companies in the country. This module will go in details about the legal framework provided to guide companies to setup their boards, the directions which have been provided to directors in discharge of their duties. It will also attempt to present a brief summary of recommendations of different committees constituted either directly by the government or in association with other quasi government institutions. 5.2 THEORIES OF CORPORATE GOVERNANCE We have to see that corporate governance has grown to become a diverse topic and its scope ranges well beyond the traditional economic domain to cover social and environmental factors as well. In addition to economic and non-economic factors that provide variety to the concept, the nomenclature also is wide enough to create ambiguity in its meaning, various similar yet different words are being used like: regulate, govern, control, manage and governance. Working under this ambiguity writers, philosophers and social scientist tend to give different meaning to corporate governance as per their own understanding. It is also accepted that corporate governance is not same for everyone, it is not one size that fits all. It cannot be a standard concept and will have a unique presence between different beliefs of promoters, organisations and even may differ among economies and countries. Owing to differences in business ownership, prevalent societal values, differences in contexts, enforceability power of board; it can be understood differently by different people and at different times. 107 CU IDOL SELF LEARNING MATERIAL (SLM)
Differences apart corporate governance is vital for every organisation, especially business companies who stand to gain a lot while following its principles and regulations. Therefore at this level we will consider the theoretical aspect of the topic. 5.2.1 The Agency Theory The Agency theory was first suggested by A. A. Alchian and H. Demsetz in the year 1972. The theory works on the premises that shareholders are the owners of the company and are termed as ‘Principals’, they appoint directors and managers or the ‘Agents’ to look after the operations of the company. The directors set strategic targets for the company and managers or the executive are responsible to undertake the fulfilment of these objectives. In this relationship the executive acts in the capacity of ‘Agents’ of the company. Therefore corporate governance will be concerned with controlling executive through setup of monitoring processes by the Principals. Since the principals do not possess specific skills to undertake the working of the company and day-to-day operations, the principals appoint the services of the agents for this work. It is expected that the agents will represent the interest of the principals over and above their personal interests and work for the achievement of organisational goals and objectives. While on the contrary the agents may get diverted from this prime objective and give preference to their personal goals and interests. The Agency theory can be depicted by the following model as in figure 1. Figure5.1 The Agency Theory Moving from left to right, the principals have self interest in the company, we can say it is maximisation of shareholders capital. For the purpose they hire the services of Agents and delegate them the responsibility to fulfil their interest. While Agents may also have their own self-interests which may or may or may not match the original interests of the Principals. For thispurpose, there is the need to corporate governance to setup policies for monitor of actions of agents and make them accountable for their performance. The important thing to note here that as per the Agency theory directors are also treated as agents to be subject to monitoring 108 CU IDOL SELF LEARNING MATERIAL (SLM)
and being accountable of their decisions and actions. There are certain characteristic of this theory which can be mentioned as follows: The major premises of this theory is the disconnection of company ownership and control. The ownership is with the Principal while the control of activities is with the Agent. The agent will be subject to rewards and punishment and their decisions and actions are accountable to the principal. In this theory corporate governance is concerned with the setup of processes, rules and regulations to monitor the actions of the Agents. The importance of monitoring mechanism originates from the fact that the agents may use their expert knowledge and skills to benefit their own interest while the principals will be left in dark of actions. The theory requires the need for accounting to reduce costs through written contracts between the principal and the agent. All terms between the two need to be written as form of good governance practices, so at a later stage there may be no conflicts in the claim of incentives or wages by the agents. The theory is concerned with the ‘Agency Problem’ as how to ensure that the agent will act to the best interest of the principal Overcoming the agency problems leads to rise of ‘Agency cost’, which is exactly the cost of monitoring activities of the agent to ensure adherence to the interest of the principal. The agency problems have two variants and depends on the ownership structures. Under economies marked with dispersed ownership (higher presence of small shareholders), when the principal is unhappy with the performance of the agents they may exit from the business, means they will sell their shares on the stock market and make capital gains. Continued selling of shares on the market will lead to the stock prices to fall and the capitalisation of the business also goes down, this in a way will be punishment to the agents. While on contrary, good performance will lead to principal increasing their ownership, resulting higher stock prices, improved performance of the company and resultant reward to the agents. In the other scenario of closely held ownership of big and dominant principal, they will aim to control the agents to deliver their interests principal. The big shareholders may even harm the interests of the smaller ones. The agency theory assumes that: all information is available at any times to all; at any time the principals are aware of the policies being taken up by the agents and their 109 CU IDOL SELF LEARNING MATERIAL (SLM)
effect on their investment; finally the directors have at all times perfect knowledge of the interests of the investors. Therefore Agency theory assumes the presence of an efficient market for labour, information and corporate control to solve the agency problem The Agency theory is among the oldest explanation for corporate governance in business. Since then many mechanisms have been suggested to protect the interest of shareholders, rationalise agency costs and improve relationship among principal and agent.’ 5.2.2 Stakeholder Theory The Stakeholder theory was first suggested by in the in 1970 but it took another 12 years for it to be formalised when in 1984 Freeman published his article to highlight the importance of stakeholders, in addition to the narrow definition of pure shareholders. It was argued that corporations owed accountability to the stakeholders of the business. The theory suggests that managers are working to serve network relationships which includes suppliers, employees and business partners. This is an improvement on the earlier network of owner-manager-employee as suggested by the Agency theory. The stakeholder theory suggests that the management needs to focus its attention on some important groups of stakeholders, while other groups of stakeholders also benefit from being associated with the business. The theory also reminds that the purpose of any corporation is to maximise stakeholder returns. The Stakeholder theory can be depicted as in figure 2: As depicted we can see that the firm is at the centre of activity, with all other stakeholder or groups or stakeholders surrounding it with their own interests. In addition to the original investor or shareholders, it also identifies other stakeholders as well and depicts their relationship with the business. The theory was the first to recognise the effect of business on extern entities and its accountability towards the society. Figure 5.2 - The Stakeholder Model (Donaldson and Preston, 1995) 110 CU IDOL SELF LEARNING MATERIAL (SLM)
Each of the stakeholder has their own ‘intrinsic’ self-interest which can be at conflict with others. The theory suggests that through networks the managers should mediate between the conflicting groups and develop harmony among them. The theory also assumes that through such mediation the stakeholders will realise that they need to work with each other and will be ready to bargain out solutions with negotiations. A more recent version of the theory attempts to classify the stakeholders into three separate groups, as: Consubstantial stakeholders: essential for the existence of a business, namely: investors and shareholders, staff Contractual stakeholders: not directly employed but under some sort of contract with the business, namely: customers, financial institutions, group of suppliers Contextual stakeholders: are envoys of social institutions which surround the business, namely: society, local administration and community There are others who criticise the theory on the basis that measure of success is not just high returns to the stakeholders, the concept is much wider and needs to include ease in flow of information in the organisation (transparency), relations among the internal and external stakeholders, the overall work environment, which should also be considered as a mark of good governance. 5.2.3 Stewardship Theory A Steward is a person who manages a property or the financial affairs of someone else, he is made a caretaker or a guardian of the affairs of some other party. Similar meaning is assigned to the Steward theory, which assigns similar duty to managers and employees of the business, the shareholders or Principal are the true owners of the company and trust the steward take great care in the conduct of operations of the corporation. It is expected that the stewards will not put their selfish interests before the interest of the shareholders. This theory places the role of managers and employees slightly higher than that of the agents, while originally the agents were working for wages, the role of steward has an element of higher responsibility, he is working from an internal desire or a moral duty to ensure that no harm comes to the company. The major traits in a steward are: trustworthiness, morality and presence of higher level of values. The only satisfaction they seek is contributing to the profitability of the company and increase in the value of shareholders capital. In way we can say that this theory aims to solve the Agency problem, while the agency theory considers the agent as being purely driven by economic gains and therefore there is a doubt as why he will commit himself to work for the interest of the principal, here the managers and employees work in autonomy and are self-driven in their pursuit. A notable benefit of stewardship is the significant reduction in the agency cost, that was originally 111 CU IDOL SELF LEARNING MATERIAL (SLM)
incurred in the agency theory to monitor or control behaviour of agents. The theory can be depicted as per the following figure 3: Figure 5.3. Stewardship theory model Moving from left to right, we can see that shareholders have interest to maximise the returns from their investments and profits. They appoint the Stewards and empower them with trust to undertake the work of managing the affairs of the company. The stewards may also have their intrinsic or internal desires but these are bounded to the extrinsic or open commitment to work for the welfare of the organisation. They in turn seek to fulfil their internal desires through their performance and want to be seen as effective stewards or managers in the performance of their functions. The stewards return the trust and the trust of the shareholders by protecting and maximising the returns on the shareholders’ wealth. Another extension of the theory is to have the Chairman and CEO positions held by the same person. While the chairman is identified with providing strategic direction the CEO manages the course of the strategy. It also prefers appointment of specialist directors on the board in preference to executive directors who wield power and may lack special skills or knowledge. Stewardship theory has found great acceptance in big Japanese corporations, which are marked with trust to the employees and they in turn commit themselves to the long term growth and prosperity of organisation. 5.2.4 Resource Dependency Theory The proponents of the Resource Dependency Theory suggest that the prime role of directors is to provide resources necessary to the organisation. Directors need to build networks with the external environment (as in the stakeholders theory), but here the difference is that these network are not for individual benefits but to secure resources for the organisation. For the purpose, in addition to internal directors, the corporate can appoint representatives of independent and external organisations. Example could be appointment of specialist directors who are members of other boards, or appointment of a specialist legal director who may support legal advice to the existing board. 112 CU IDOL SELF LEARNING MATERIAL (SLM)
Supply of resources is necessary to the survival and growth of companies, the directors ensure the availability of skills, selection of suppliers, information and key skills. The directors also arrange for the legitimacy of the company and its association with policy makes and respected social groups. Directors can be of the following four types: The Insiders: current and previous employees of the company who have matured in experience to provide strategy and direction along with their specific expertise, like legal, cyber security or innovation The Business experts: maybe the current or former senior executives or directors of other companies. They will bring to the company their expertise on business decision making and solving issues. The Support Specialists: in common terms are the professionals, external to the organisation, who provide their expertise in their specialised field. Examples of support specialists could be investment bankers, IT experts or R&D professionals The Community Influencers: people not directly connected to the conduct of business, yet their opinions are valuable in the growing sphere of corporate governance. Examples could be social leaders, environmental experts, academician or leaders with political allegiance The boards of directors, in their pursuit resources manage and protect the organisation from environmental uncertainty. The need of business organisations to acquire resources results in emergence of exchange relationships with other supplying organisations. These relationships and interdependencies sustained over a greater time period gives possibilities of reduction in transaction costs and savings to the organisation. Interdependencies which arise due to unbalanced distribution of resources can differ in intensity due either: The relative importance of resources to the society and environment The ready availability or the possible shortage and The concentrated or dispersed availability of the resources 5.2.5 Political Theory The political theory recognises the importance of the democratic process at the board level and in corporate governance. It seeks to develop support of shareholders for voting in favour rather than to indulge in unethical practice of buying their votes. Over the past decade governments of many countries have resorted to increasing interference in corporate affairs, a 113 CU IDOL SELF LEARNING MATERIAL (SLM)
part of which has been control the unrestricted exploitation of resources and also curtail the growing powers of MNCs to their benefits. 5.3 EFFECT OF ETHICS THEORIES ON CORPORATE GOVERNANCE In addition to the major theories of pure corporate governance there are other theories of ethics which have a bearing on the concept. Most important among them are the: Theory of Business Ethics and Theory of Virtue Ethics. 5.3.1 Theory of Business Ethics The theory concerns itself with the normative part (correct and incorrect) of business decisions, activities and managing situation. With their ability to generate vast amount of employment, products and services and ideas, the power and influence enjoyed by business has gone stronger than ever before. Similarly the effects of scams on business, loss of production and eventual collapse also impact the economy and the society in greater ways than before. While such has been the growth and impact of business, its promoters and managers are rarely educated in formal corporate governance leading to side tracking of rules and regulations and at times even complete disregard to existing ethical and social norms. This theory aims to introduce the elements of ethics and morality in the way directors and managers undertaken business decisions and activities. 5.3.2 Theory of Virtue Ethics This theory aims to build moral excellence and good character to act in situations, specially that may attract to be unethical. Virtue is a state in which a person organisation act in specific situations. Virtue are not habit, as habits can be wrong while the person is unaware of their virtuous state. Virtue is marked with two separate characteristics of being: Affective in virtue: develop positive feelings after doing the right thing, it’s about the emotional well-being of virtue Intellectual in virtue: doing the right thing due to right reasons, it’s about the rationale of being virtuous It is believed that virtues can be inculcated through education and exposure to ethical practices. Such behaviour is bound to bring is sense of fulfilment to the directors and management and also to the moral standards of the society. 5.3.3 Closing thoughts on Theories of Corporate Governance Whichever way we look at corporate governance or whichever theory we employ to seek its understanding, the most important aspect that comes common to all explanations is the accountability of directors towards the investors and other stakeholders. The basic foundations of corporate governance that is accountability, transparency and frailness in 114 CU IDOL SELF LEARNING MATERIAL (SLM)
operations help gain and maintain shareholder trust and develops business sustainability. The role of corporate governance is critical to assure the stakeholders that the company affairs will be conducted both with honesty and intelligence. The scope and understanding of corporate governance differs with countries, possibly due to differences in culture, political institutions, social norms and historical background. Even with such awareness and government will there are increasing case of breach in governance principles. In this scenario it is all the more important to educate the directors of the cause and also raise awareness among the stakeholders for greater demands upon the directors and management for responsive behaviour in the conduct of business activities. 5.4 FEATURES, STRUCTURE AND STANDARDS WHICH EFFECT CORPORATE GOVERNANCE IN INDIA Corporate governance is not a new concept in the Indian economy and business. It has been gaining popularity over the past 2 decade. In fact, before the modern concept came be to be implemented there were many progressive thinking companies had put in place some aspects in their functioning. Recent banking and financial scams have renewed an accelerating concern for Indian companies. Some people blame an oversight of the government in this regard, while others blame the over patriarch type ownership of small and medium firms. Indian government and Industry associations have made sure that the structure to develop, support, implement and audit corporate governance in India is as per international standards. The framework of corporate governance for the industry is driven by the following laws, rules and regulations, guidelines, recommendations and best practices: 1. The Companies Act, 2013: Amended over the original Act of 1965, this is basic foundation of structure for the Indian Industry. Specifies the constitution of boards, rules with respect to conduct of meetings, autonomy to the members of boards, conduct of reviews, appointment and powers of advisory groups and other rules with respect to the rights and duties of business stakeholders. A detailed section on the role of the Act towards Corporate governance will be followed in a subsequent section. 2. Guidelines issued by Securities and Exchange Board of India (SEBI): SEBI is premier body that enforces guidelines all companies listed on any of the Stock Exchanges of India. Guidelines issued by SEBI are focussed on structure of boards, ensuring lawful trading of stocks and protection of interest of investors. There is separate section on the role of SEBI for the promotion of corporate governance. 115 CU IDOL SELF LEARNING MATERIAL (SLM)
3. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): an autonomous body ICAI sets standards of for maintaining company accounts, audits, and financial information disclosure. The ICAI is the body which issues licenses to Chartered Accountants. It drafts and releases accounting standards and provides guidelines for disclosures of financial reporting. As a step to better corporate accountability the New Companies Act requires financial statements to give a correct and fair idea of company affairs, the documents need to be prepared as per accounting standards. 4. Institute of Company Secretaries of India (ICSI): a self-ruling body, ICSI issues Secretarial Standards and norms with respect to arrangements of the Companies Act 2013. The ICSI issues secretarial standards as per the provisions of the Companies Act 2013. Some of the standards issued are: Meetings of the Board of Directors and Secretarial Standards on General Meetings 5.4.1 CII Code of Desirable Corporate Governance (1998) The first formal step to introduce Corporate Governance in history Indian industry was taken up by the Confederation of Indian Industry (CII) to frame a voluntary code of conduct for all listed companies in India. This is known as the CII Code of desirable corporate governance. The major recommendations of this Code can be summarised below: a. all listed companies having turnover of more than Rs. 1,000 million to have professionally competent non-executive directors, with: b. The non-executive directors should have clearly defined responsibilities, need to play important role in corporate affairs and maximise long-term shareholder value, they should strive to be active in boards and not just be passive advisors. They should be able to read financial statements and be knowledgeable about company laws. c. Board members should not be members of more than 10 companies. d. All members of board to meet at least six times in a year with a clear agenda to spend at least half a day per meeting. e. Any member who has not attended any meeting, should not be re-appointed. f. In addition to the latest financial and audit reports, any other report related to any legal case or notice, accidents to be shared at time of regular meetings. g. All listed companies with turnover of Rs. 1,000 million or having a paid up capital of Rs. 200 million needs to setup an audit committee within a period of two years. h. It would be optional to prepare and submit consolidation of group accounts. i. A compliance certificate signed by the CEO and CFO need to by companies to the stock exchanges 116 CU IDOL SELF LEARNING MATERIAL (SLM)
5.4.2 Kumar Mangalam Birla Committee Possibly the first major start for Corporate governance in India was the constitution of the Kumar Mangalam Birla Committee set up by the Securities and Exchange Board of India (SEBI) in 1999. The aim of the committee was to find methods to encourage the industry to accept corporate governance as a good practice. The committee made efforts to view the concept from viewpoint of the shareholders and investors. It prepares a Code that would be suitable to the Indian business environment. The recommendations of the committee were broadly divided into two major categories: 1. Mandatory recommendations: aspects that the committee found to be necessary and felt that they need to be enforced upon the companies through policies, these can be summarised as: a. The mandatory recommendations will apply to all companies listed on any stock exchange having a minimum paid up capital of 3 crore b. The board of directors should be optimally composed of executive and non-executive members c. There need to be 3 independent directors on the audit committee, with at least one each specialised in accounting and financial knowledge. d. Each of the listed committee should setup a Remuneration committee e. The board has been mandated to meet for every quarter, with gap of not more than 4 months between successive meetings. Each meeting would review issues related to operational planning, capital budgets, three months results and minute of meetings of individual committees. f. The committee membership of each director has been limited to 10, and similarly he cannot chair more than 5 committees across his membership on boards of different companies. g. The board will ensure that important documents specified will always be made available for external review. h. The board will also ensure to share all investment related information with the shareholders of the company. 2. Non Mandatory recommendations, were more of desirable features or those which may require possible changes in existing laws at later date, these ae listed as follows: a. Role of chairman b. The working of the Remuneration committee c. Right of shareholders to receive the half yearly financial report d. Role of Postal ballot in voting of some critical matters 117 CU IDOL SELF LEARNING MATERIAL (SLM)
e. Concerning the possible sale of full or substantial part of the company f. Relevant to corporate restructuring g. Related to additional issue of capital h. Decision of the board to venture in new opportunities of business The recommendations of committee were meant to be applicable to all listed companies irrespective of their being in the private or public sector undertakings. The rules were to be applicable to the directors of the companies, management and staff and all professionals associated with the company. It was felt that given the revolutionary state of recommendations at that time, many companies would need to restructure their boards, smaller ones may need more time to create structure for these recommendations. It has however been felt that for Indian conditions a statutory model is much suitable and hence recommended as compared to applicability of a voluntary code, which works on the premises self-commitment. As per recommendations of the Kumar Mangalam Birla Committee’s report all listed companies now need to comply to the new Clause 49 of the Listing Agreement. Post the submission of the report, SEBI accepted most of the recommendations in the new Clause 49 of the Listing Agreement in 2000, this was later amended in 2012 to include transparency and disclosure norms of all listed Indian companies. The committee recognised the presence of other entities in addition to the shareholders, such as the employers, customers, bankers, creditors, and suppliers of a company. While there was the component of government – at local, state and national levels and finally the society, whose interests were also to be considered by the business. The committee highlighted the truth of codes needed to be implemented and not just drafted to suit the requirements. Recommendations of the committees in relation to composition of the board: board should have an optimal combination of directors as executive and nonexecutive not less than 50% of the board should comprise of non-executive directors for a company which has a non-executive chairman, then independent directors should comprise minimum one-third of board for a company with an executive chairman, then independent directors need to be at least half of the board As per the recommendations the concept of Independent Directors was introduced, who would be in non-executive position. The Independent directors will have no financial relation with any member of the company or promoters, employees or any subsidiary, they will be only paid the usual director’s remuneration. 118 CU IDOL SELF LEARNING MATERIAL (SLM)
5.4.3 Naresh Chandra Committee In the year 2002 the government of India constituted the Naresh Chandra Committee, along with illustrious committee members: Mr. J. J. Irani of Tata Sons and Mr. Uday Kotak Chairman of Kotak Mahindra Bank among others. It was constituted to recommend amendments to auditor-client relationships and role of independent directors. The committee after considering many aspects of company affairs came up with the following recommendations: a. Any listed or unlisted public limited company with a paid up capital and free reserves of Rs. 100 million and above, or having a turnover of Rs. 500 million and above should have a minimum of seven board members, with at least four independent directors. b. The same type of companies should have not less than 50% as independent directors c. For the same type of companies the audit team needs to be changed after every 5 years. d. As a condition, every audit team needs to submit a ‘certificate of independence’ to the audit committee of the board e. The committee recommended a list of disqualification items for audit. f. It prohibited the audit firms from undertaking certain services towards any audit client, like: Maintaining accounts, internal audit, investment advisory, actuarial services, investment banking valuation of assets, or recruitment of any staff. g. The CEO and CFO of a listed company need to jointly issue a certificate of compliance on corporate governance 5.4.4 N. R. Narayana Murthy Committee In the year 2003 SEBI constituted a new committee headed by Mr. N.R. Narayana Murthy, Chairman of Infosys. The aim was to review and make appropriate recommendations about the performance of corporate governance in India. The main recommendations of the committee can be summarised as follows: a. A person will be eligible to be a non-executive director for not more than nine years, over each term of three years b. Companies can themselves decide about the retirement age of directors c. Only non-executive directors with a skills in financial can be members of audit committees d. It will mandatory for audit committees to review information related to: financial statements, reports on risk management, auditor letters, transactions among other things e. Any investment made by a subsidiary company into a parent company will be reviewed by the audit committee 119 CU IDOL SELF LEARNING MATERIAL (SLM)
f. The independent audit committee should be presented with statement of all transactions for the purpose of approval and ratification. g. Risk management procedures of the company to be informed to all board members during the regular board meetings. h. Companies will disclose information about uses and application of funds to the audit committee while raising capital through an IPO i. The board will be under obligation to lay down a code of conduct applicable to all board members, the CEO and the CFO will finalise the signed copy of the annual report j. Any director who wishes to become an independent will need to satisfy conditions as laid down by the committee k. Any staff who notices any unethical behaviour within the company will not need to inform his superior to report such a happening to the audit committee. Companies will ensure that the right to access is suitably communicated to all staff and will submit an affirmation to this effect in the board report of corporate governance forming part of annual company report. l. The CEO and the CFO will certify about the truthfulness and fairness of the company’s financial statements. The recommendations submitted the Narayana Murthy committee were accepted by SEBI as Clause 49 of the Listing Agreement of 2003 and 2004. An introduction to a provision in the Companies Act, 2013 is considered the final acceptance of Corporate Governance towards effective management of companies in India. It seeks to achieve the objectives of transparency, accountability and high standards of corporate governance through: a. Composition and requirements of board members b. Obligations and responsibilities of the Board c. Appointment of independent Directors and their role and responsibilities d. Appointment of women directors on the board e. Participation of shareholders at shareholders’ meetings and ensure their rights f. Rules regarding disclosure of Information g. Criteria for setting remuneration and its types h. Implement steps towards CSR and ensure compliance to the standards issued by the Institute of Company Secretaries of India 5.5 STRUCTURE OF CORPORATE GOVERNANCE IN INDIA 5.5.1 Ministry of Corporate Affairs - MCA The organisational structure of Corporate Governance in India in headed by the Ministry of Corporate Affairs (MCA - www.mca.gov.in). The Ministry is responsible for laws and 120 CU IDOL SELF LEARNING MATERIAL (SLM)
regulations as per the Companies Act 1956, the Companies Act 2013, The Liability Partnership Act 2008 and other related acts which all have been enacted to provide rules and regulations concerning the functioning of corporates and Industry in India. In addition the Ministry also ensures prevention of anti-competitive policies and protect consumer interest under the Competition Act 2002. Beyond the interpretation of existing laws for the industry and ensuring their implementation the Ministry has also made some interesting observations about the concept with respect to Indian situation, which can be presented as follows: 1. Considering presence of different types of companies with differing corporate structures, ownership and size the Ministry recommends a structure of corporate governance that can be used without much adjustment and changes. While for smaller companies there can be consideration of certain exemptions which are peculiar to big corporations. 2. MCA feels that the current principles will be later be converted into more stringent standards and codes of governance which will be driven by a strong regulatory body. It feels that such regulatory bodies will have an important role to play in foreseeing the scope of corporate governance in the time to come. It feels that that the current polices and the expected regulations should all be consistent to the other corporate laws. 3. The reality of corporate governance is much greater than making management accountable for shareholders capital. Such a limited view is not justifiable to other stakeholders and is also against the interest of the companies themselves, who are in constant touch with greater societal and environmental issues. 4. At times the intervention by government and associated agencies in the internal affairs of companies inhibit them from thinking and acting freely. Companies should be alternatively made responsible to design and implement policies that suit them best for corporate governance. 5. MCA opinions that a constant atmosphere of suspension over the functioning of companies also disrupts their normal process. Too much controls may lead to companies wasting time to evade supervision and control. Especially smaller companies, who lack professional advice, may experiment new ways in total good faith. Constant supervision and mis-trust may result in hampering their improvement process. 6. With special reference to un-listed Private Limited Companies, it feels that they also need to ensure flow of information about their conduct of operations while maintaining flexibility in work 5.5.2 The National Foundation for Corporate Governance Constituted in 2003 by the MCA, the National Foundation for Corporate Governance - NFCG, is the result of partnership of MCA with other professional organisations: CII, 121 CU IDOL SELF LEARNING MATERIAL (SLM)
Institute of Company Secretaries of India - ICSI and Institute of Chartered Accountants of India (ICAI), the National Stock Exchange - NSE and Indian Institute of Corporate Affairs - IICA. In association with partner centres and organisations it conducts conferences, workshops and seminars to promote the cause, it also promotes research work along with its partner and trustee organisations. The main objective behind NFCG was to involve companies and facilitate sharing of ideas, good practices and experiences among corporate leaders, directors, policy makers and law enforcers. NFCG is a not-for profit trust. The other objectives of NFCG are: To boost building capacity in new aspect of Corporate Governance. To promote the growth of corporate governance in India through education and research funded scholarships. To further a culture of good governance among industry, encourage voluntary compliance and enable effective participation of business stakeholders. To build background for best business practices, governance structure, policies and processes and environment of ethics. 5.5.3 The Securities and Exchange Board of India, SEBI The Securities and Exchange Board of India- SEBI was founded in the year 1988. Its prime objective has been to regulate activities of stock markets and protect the investors interests. Its policies towards Corporate Governance are based on the SEBI act and aim at restrict fraudulent practices in the stock markets, all listed companies are required to follow the prevailing rules and regulations of SEBI and any amendment to them. In terms of investor protection there have been notable contributions by SEBI to protect investor rights. Under Clause 49, SEBI ensures monitoring and regulating the process of good governance of all listed companies. SEBI has also set up special committees, like the Kumar Mangalam Birla committee to submit recommendation on corporate governance. 5.6 REGULATIONS FOR CORPORATE GOVERNANCE The Companies Act, 2013 got enacted on 12th September, 2013 which repeals the original Companies Act, 1956. The new Act puts into implementation a formal structure to guide corporate governance in the industry by improving the process of disclosures, improvement in reporting and better transparency. Among the major areas with respect to corporate governance in the new act are: Role of Independent Directors Appointment of at least women directors in all listed companies Increasing the scope of Audit Committees Appointment of Nomination and Remuneration Committee 122 CU IDOL SELF LEARNING MATERIAL (SLM)
Provision of Internal Audit Setup of Serious Fraud Investigation Office (SFIO) to investigate frauds on the company in respect to complaints from institutions or the government Rules about Corporate Social Responsibility (CSR) The revised Act requires the following committees to be setup by the board: Audit committee Nomination and remuneration committee Stakeholders relationship committee Corporate social responsibility committee Notable mention of corporate governance is also found in other acts, namely: The Competition Act enacted in 2002, which replaced the Monopolies and Restrictive Trade Practices Act, 1969 The Foreign Exchange Management Act,1999, which replaced The Foreign Exchange Regulation Act,1973 The Industries Development and Regulation Act which as enacted in 1951 5.6.1 Setup of Audit Committee The Audit committee is a monitoring mechanism over the board and other committees with members of board of director. The Audit committee should be comprised of at least three directors. Through the monitoring process it aims to fulfil the requirement of transparency, setup of risk management structure, prevent frauds, provide efficiency in internal and external audit process and easiness in financial reporting. As per section 177 of the Companies Act, 2013 all companies with the following eligibility need to have an Audit Committee: every listed and public companies with paid up capital of Rs. 10 crore or more companies having a turnover of Rs. 100 crore or more Companies having loans or borrowings outstanding on their account or issued debentures or deposits, the total of which exceeds Rs.50 Crores or more in total The chairman and the members of the Audit committee also need to monitor compliance of ethics in the organisation and act as ‘whistle-blower’ in case they notice any discrepancy in affairs. 5.6.2 Subsidiary Companies The board members of the holding company need to have some links with the board members of the subsidiary company as measure of monitoring its, this has been recorded in the revised Clause 49. In addition the Audit committee of the holding company will also review the financial reporting and investments made by the subsidiary company. As per the Companies Act 2013, joint ventures and associate companies will also be considered as Subsidiaries. 123 CU IDOL SELF LEARNING MATERIAL (SLM)
5.6.3 Role of Institutional Investors We have seen the role of Foreign Institutional Investors in the previous chapter, similar there are Indian Financial Institutions who may want to reach the international market. This opens a new chapter of corporate governance in companies where they may want to invest. Good governance will attract the interest of these Institutional Investors. The Institutional Investors may also attend the AGMs and cast their voting rights, they also need to disclose reasons for either voting in favour or against motions where they have cast their vote. 5.7 SUMMARY Differences apart corporate governance is vital for every organisation, especially business companies who stand to gain a lot while following its principles and regulations. Therefore at this level we will consider the theoretical aspect of the topic. Owing to differences in business ownership, prevalent societal values, differences in contexts, enforceability power of board; it can be understood differently by different people and at different times. The Agency theory suggests the relationship of shareholders termed as ‘Principals’, that of directors and managers or the ‘Agents’ appointed to look after the operations of the company. Here corporate governance will mean controlling executive monitoring by the Principals. It suggests that the agents may get diverted from their objective and prefer their personal goals and interests. The theory brings up the Agency Problem how to make agent act to the best interest of the principal, for which it assumes the presence of an efficient labour market, easy flow of information and corporate control. The Stakeholder theory highlights the importance of stakeholders and argues that corporations owe accountability to them. It suggests that managers work to develop network relationships to benefit the business. Due to different stakeholders having their own interests there can be conflicts among them, where the managers need to mediate and develop harmony among all groups. The Steward theory opinions that the shareholders or Principal are the true owners of the company and appoint manager as steward to take care of the business. The theory expects that the stewards will not give priority to their personal. The theory recognises major traits in stewards as trust, moral thoughts and high values. This theory aims to solve the Agency problem by assuming that the managers and employees will be self- driven. The theory recommends that the Chairman and CEO positions should be held by the same person. As per the Resource Dependency Theory, the prime role of directors is to provide necessary resources to the company, for which they build networks with the external environment to secure resources for the organisation. Business can appoint 124 CU IDOL SELF LEARNING MATERIAL (SLM)
representatives of independent and external organisations, like specialist directors. The directors will also provide legitimacy to the company. Last of the theories on corporate governance is the political theory which gives importance to board level democratic process and develop support of shareholders rather than to buying their votes. There are two other theories of Ethics on corporate behaviour; theory of Business Ethics which is about the normative part and morality of directors and managers while undertaking their duties. The other is the Theory of Virtue Ethics which recommends to moral excellence and good character over unethical action. It believes that virtues can be learnt through education and experience. The rise of corporate governance in India has been due to joint action of the legal action of government and the rising awareness of industry. The framework for ensuring corporate governance in India is through the individual and joint actions of: a. The Companies Act, 2013 the basic foundation of structure for the Indian Industry b. Securities and Exchange Board of India guidelines for all companies listed on any of the Stock Exchanges of India c. Accounting Standards issued by the Institute of Chartered Accountants of India which sets standards for maintaining company accounts, audits, and financial information disclosure. d. Institute of Company Secretaries of India issuing Secretarial Standards and norms Major steps taken in terms of codes and committees for recognition of corporate governance in the country are: CII Code of Desirable Corporate Governance (1998): to frame a voluntary code of conduct for all listed companies in India with reference to appointment of directors, their working and their accountability. The Kumar Mangalam Birla Committee set up by SEBI in 1999 with an aim to find methods to encourage the industry to accept corporate governance as a good practice. The committee made recommendations into two major categories, the Mandatory recommendations, which are necessary to be enforced upon the companies and the Non Mandatory recommendations, considered as desirable features The Naresh Chandra Committee, constituted to achieve objectives to examine and recommend amendments to auditor-client relationships and role of independent 125 CU IDOL SELF LEARNING MATERIAL (SLM)
directors. The committee came up with recommendations on appointment and role of directors and rules about maintaining and sharing of financial information. The N. R. Narayana Murthy Committee constituted in 2003 by SEBI to review and make appropriate recommendations about the performance of corporate governance in India. The recommendations of the committee dealt with role of directors, their exit from the company, their skills, rules regard to audit and Risk management. The structure of corporate governance in the country is governed by the Ministry of Corporate Affairs, NFGC, SEBI, regulations like set up audit committees, governance of subsidiary companies and role of institutional investors. 5.8 KEY WORDS Trustworthiness: which deserves trust and confidence of others, the ability to being reliable for actions, absence of any deceitful behaviour Virtue: display of high moral standards in behaviour, doing something that is correct and to avoid things which are wrong. Sustainability: it the capacity to continue in the way decided, capacity to coexist with other members of the society without causing them any harm. Regulatory framework: is a model or structure that can be used to effect improvements in an entity or process, making its acceptance to be binding on those concerned with it. CSR: Corporate Social Responsibility is the practice and actions to have a positive impact on sections of society needed support. The actions done are voluntarily, out of charity and without seeking any economic gain. 5.9 LEARNING ACTIVITY 1. Compare the effect of Agency Theory and Stakeholders Theory on the role of Board of Directors of a company. ___________________________________________________________________________ ___________________________________________________________________________ 2. Give two points to support your answers that the Kumar Mangalam Birla Committee has been successful in its objectives. ___________________________________________________________________________ ___________________________________________________________________________ 5.10 UNIT END QUESTIONS 126 CU IDOL SELF LEARNING MATERIAL (SLM)
A. Descriptive Questions Short Questions 1. Who are the Principals as per the Agent theory? 2. What are the different networks that managers need to develop as per the Stakeholders Theory? 3. What are the different types of directors as per the Resource Dependency Theory, support your answer with examples? 4. Define the term CSR and mention any five applications. 5. What is an Audit Committee? Long Questions 1. How much relevant is the Agency problem for today’s modern business? What can be the role of shareholders to solve to solve this for their benefit? 2. Do you agree that today’s corporations want their managers to act like stewards? How beneficial it would be for all parties if they follow such principles? 3. When it is said that Corporate Governance comes from heart, they why do governments take keen interest to drive rules and policies with corporations? 4. How would you define Normative behaviour for business managers? To what extent is this relevant to ensure commitment from business executives? 5. What could be findings on which the Kumar Mangalam Birla Committee made its recommendations? Do you feel that in future the non-mandatory recommendations may be converted to mandatory requirements, suggest by giving reasons? 6. The Ministry of Corporate Affairs in one its observations suggests that too much of supervision is not advisable. Do you agree that too much of control is advisable to enforce rules and regulations on corporates, support your answer with reasons? 7. What would you understand by the term ‘auditor-client relationships’? What further measures of improvement would you suggest to make this stronger and suit the principles of Corporate Governance? 8. What are the provisions in the Companies Act, 2013 regarding corporate governance? Take example of any three and explain how this will contribute to better corporate governance. 9. What is the reason of setting up independent committees? Take example of any one and comment how its setup will result in improvement in governance. 127 CU IDOL SELF LEARNING MATERIAL (SLM)
10. In the current environment corporate governance has started looking at Sustainability and concerns towards the environment. Do you agree with this notional shift and believe that this lead to benefits to the industry? Support you answer with examples. B. Multiple Choice Questions 1. As per the Resource Dependency theory, senior executives or directors who bring their expertise for business decision making are _________________ a. The Insiders b. The Insiders c. The Business experts d. The Support Specialists 2. Display of moral behaviour and to avoid doing things wrong things is _______ a. Ethics b. Trustworthiness c. Virtue d. Accountability 3. The Companies Act 2013, does not mention which of the following a. Institutional Investors b. Role of Independent Directors c. Appointment of women directors in companies d. Nomination Committee 4. As per the Kumar Mangalam Birla committee, how independent directors can be appointed on board a. 1 b. 2 c. 3 d. 4 5. A company that has full control of another company is known as _____________ 128 a. Holding company b. Parent company c. Owner company d. Investor company CU IDOL SELF LEARNING MATERIAL (SLM)
Answers 1-b, 2-c, 3-c, 4-c, 5-a 5.11REFERENCES Text Books: S.A. Sherlekar, Ethics in Management, Himalaya Publishing House William B. Werther and David B. Chandler, Strategic corporate social responsibility, Sage Publications Inc Robert A.G. Monks and Nell Minow, Corporate governance, John Wiley and Sons Reference Books: W.H. Shaw, Business Ethics, Cengage Learning Beeslory, Michel and Evens, Corporate Social Responsibility, Taylor and Francis Philip Kotler and Nancy Lee, Corporate social responsibility: doing the most good for company and your cause, Wiley Subhabrata Bobby Banerjee, Corporate social responsibility: the good, the bad and the ugly, Edward Elgar Publishing Satheesh Kumar, Corporate governance, Oxford University, Press 129 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 6 ETHICAL ISSUES IN INTERNATIONAL BUSINESS PRACTICES STRUCTURE 130 6.0 Learning Objectives 6.1 Introduction 6.2 What is Culture all about? 6.2.1 The core components of Culture 6.2.2 Patterns of Cultural Differences 6.2.3 Challenges of Cultural Difference in International Business 6.3 Cultural Awareness 6.3.1 Cultural awareness for the African continent 6.4 Cross Culture in International Business 6.4.1 How Cross Culture Works 6.4.2 Kinds of Cross Culture effects 6.4.3 The Advantages and Disadvantages of Cross Culture 6.4.4 The Disadvantages of Cross Culture 6.4.5 How cultural differences impact international business 6.4.6 How to overcome challenges of Cross Culture 6.4.7 Key Takeaways of Cross Culture 6.5 Culture Shock 6.5.1 Understanding Culture Shock 6.5.2 The Stages of Culture Shock 6.5.3 How to Overcome Culture Shock 6.5.4 Reverse Culture Shock 6.5.5 Key Takeaways 6.5.6 Closing thoughts on Cross Cultural and Ethical Conflicts in International Business 6.5.7 Guidelines for working towards Multicultural Collaboration 6.6 Real-life Business Case Studies About Culture CU IDOL SELF LEARNING MATERIAL (SLM)
6.7 Summary 6.8 Keywords 6.9 Learning Activity 6.10 Unit End Questions 6.11References 6.0 LEARNING OUTCOMES After studying this unit, you will be able to: Discuss the importance of Culture and its effects on society and business Appreciate the importance of cultural awareness for better business decision making State the ethical issues of not being aligned to the culture of business partners and how it may harm the performance of business Explain the concept of Cross culture and why it’s important to individuals and companies Explore live examples when corporations failed to understand of cultural differences that led to failure of business ideas. 6.1 INTRODUCTION We all communicate with others, be it family or for business purposes. However hard we try there are always some challenges present in our communication, be it we do not understand what the other person wants to tell us or our inability to transfer our thoughts to the other person. We always try more to tell what we are thinking or what we want, in our hurry we do not want to understand what the other person may want to hear. This is where communication mostly break down. Similar to principles of communication there is a principle of Culture that defines our lifestyle, how we think, how we may react to situations. Culture is the set of values that we have is often the root of communication or the challenges of communication. In this module we will explore the identity of culture, what makes it so important in our daily life and also in business decisions. Over the past many decades, with companies eager to expand operations in multiple countries the importance of understanding culture has increased tremendously. The module will attempt to present how culture develops over a time for a community, it will also explore the key components of culture and how these components effect how we look at events in life. As important as understanding of culture, it has its shortcomings also. Business venturing into new territories without proper understanding of its culture may lead bad decision making. We will see why business ideas may fail and professional relations may be deteriorated with cultural faux pas. 131 CU IDOL SELF LEARNING MATERIAL (SLM)
As close to understanding different cultures, it is also important to be aware of cultural differences. It is not ethically correct to consider oneself from a superior culture while looking at other cultures with inferiority. We will look at such instances when realisation of differences in cultures is beneficial to the long term interest of companies. Similarly, it is also beneficial to be aware of how the culture of other countries may affect that of the company or its staff working at off location. With expanding business comes the need of providing it with able management and control, it may not always be feasible to find local talent to suit the needs for which the only option is send domestic workers on deputation. This opens the study of another interesting chapter in the study of culture, which is Cross Culture. We explore how the relevance of cross culture has raised, what effects it has on the mental state of the person travelling to new places for work. There are further ethical issues of making people work in unknown countries driving pure business interests of the parent companies. The last two decades have seen more people traveling abroad for work on temporary assignments as companies expand across intercontinental boundaries. We will see the efforts that have been taken to better prepare the workforce while they change countries in pursuit of work better living. A section of this module will also be concerned the new found issue of cultural shock. Reasons why employees settled on deputation may be uncomfortable and what effects these discomfort may have on their professional and personal lives. The module will present measures that MNCs have taken to reduce Culture Shock when people move to locations for work. The world is becoming smaller day-by-day and international boundaries are opening to invite business. Therefore, the international businesses will have to become more sensitive in its understanding of culture, its differences and how to coop with challenges of relocation of staff to other countries. 6.2 WHAT IS CULTURE ALL ABOUT? Although this is not a study of social behaviour or anthropology, however we will devote the next section to understanding the nuances of Culture, its characteristic and causes of difference. Such an understand is necessary to appreciate cultural difference while dealing with a diverse base of business partners. Culture is what forms and develops our values, builds attitudes and induces our behaviour. It is a knowledge that is acquired from the surroundings, it is learned from experiences, it just does not builds up inside. Most importantly it is shared by a large number of people and is passed on from one generation to another. This does not mean that being passed on across generations, culture is un-changed, each generation evolves itself on the previous legacy and enriches it to be passed onto future ones. 132 CU IDOL SELF LEARNING MATERIAL (SLM)
It is a tool that societies use to interpret how they see things, how they interpret the meaning of happenings around them. They also use it as a medium to make sense of their experiences and encode their social and professional behaviour to be understood by others in the same or different society. For example, oriental and eastern societies have a culture of respect towards natural surroundings, while the western culture is more open to question its existence. Therefore, while oriental societies focus on seeking benefits and blessings from the elements of nature, the western world seeks to dissect the and tame the sources of these surroundings. Both of them are correct in their approach, it can be felt that while the orientalists thrived in the comfort of delta plains with unlimited food supplies, the explores in the west had to fight the extremities of nature for survival. Therefore culture can also be defined as a collection of complex human beliefs having evolved over civilizations, being specific to a race or the time period in which it evolved. In our daily lives we find culture to be a reflection of differences in languages, the way people reach out in worship towards their deities, food habits, different ways to be entertained and of course the unison of all these to form a monocultural or multi-cultural society. Two important themes along which culture can be organised are ‘Diversity and Change’. While Diversity is the characteristic that makes people ‘different’ from other cultures, based on their upbringing and the environment in which they have lived. Therefore our culture may be different to our next door neighbour who may be from another part of the country, yet it would be very similar to some of our relatives living in other countries. Change is the other theme on which culture is based, which is caused due to need to adapt our lives and transform our actions due to physical forces and biological evolutions. Culture is passed on to successive generations, not in its original form but with changes. This may be either due to ‘selective transmission’, that is we may not teach all the things to our children that we learnt from our parents. The other is how we modified our parental learnings due to our personal experiences and modified culture to ‘changing needs’. Therefore we can summarise Culture as: Can be Learned either through active teaching by previous generations or through personal experiences. It is Shared, meaning it is not kept to a person, but culture is a shared entity. It is not one time, but it is Patterned, meaning that the ides imbibed by culture just keep coming back, you tend to think and behave in a similar pattern on similar occasions, that’s your culture. Adaptive, it helps people meet modify their culture to meet needs due to the changes in the environment. Culture is not systematic, it is more of Symbolic. Sometime what we say we actually do not mean it, or what we say and mean in our culture may not mean the same with others. For example, namaste with folded hands maybe misunderstood in cultures where hugging to welcome is an accepted norm. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
But one thing that is unanimous about culture is its need for change. Differences in culture across societies, religious groups and countries is a measure of at a particular point of time. But change in culture is for the same group but over a course of time. So one society may change its culture very fast or maybe slow over the similar point of time as compared to any other society that has changed itself over the same period of time. 6.2.1 The core components of Culture How the power is distributed with the society, some societies have strict hierarchy of power that flows as higher power at the top which reduces as it moves down. Particular case of more patriarchal societies, fathers, bosses, leaders having more power as compared to those below them. Others may have an egalitarian way of sharing power, equally among the members. The degree to which people are committed to themselves. On one extreme are those who solely work for their own benefit and on the other are those who want to share resources equally, the presence of collective kitchens in some villages is a proof of this. This marks the Social relationships maintained by people. How do members of the society look at the environment, they may want to exploit natural resources for pure economic purposes or may want be in harmony of the natural elements while just borrowing something for survival. There are fishing communities who do not catch more than they need it to be on their table, while are others who use mechanised super vessels for this purpose. Societies differ in their work patterns, some may be ready to be engaged in multiple activities of cultivation, trading and manufacturing, while others may be comfortable of only one and specialize on it. Societies may be explorers or settlers at different times. It is due to the differing levels of acceptance of uncertainly and keenness for social control. Overwhelmed by shortages and uncertainty of food and resources may make even the settled ones to become explorers. 6.2.2 Patterns of Cultural Differences Business operates in multi-dimensional environment and managers need to be aware of cultural differences as they deal with partners across geographical boundaries. Although it would be nearly impossible to be an expert in another culture, yet there are some fundamental patters to look out for when travelling to meet people of different cultural background. It will help to see things in a different perspective and from the point of view with whom one is meeting. 1. Differences in styles of communication 134 CU IDOL SELF LEARNING MATERIAL (SLM)
Forms of communication differ between and across cultures, same words may also mean different to different people. The term ‘nice work’ maybe an encouragement to an Indian or American workers, but for the English mere nice just not enough, it may be a sign of improvement. In addition to verbal communication, there are differences the way non-verbal communication is considered, which not limited to just facial expressions but also hand gestures, maintaining distances and punctuality of time are also ways difference is understanding may occur. It’s said that you cannot learn proper Italian till you learn how to make gestures with your hand, it is like half the language is spoken with your hand movements. 2. Differences in attitude towards conflict While western management openly supports conflict as a way of ensuring building of diverse thoughts, European and even Asian cultures frown upon open conflict in meetings or gatherings, here it is advisable to find solutions and then attend meetings with unanimous decisions. 3. Differences in approach to complete work Differences in the way resources are available, perspective towards completion rewards, and way people value time lead to cultures looking at ways to complete work differently to others. When dealing with multi-cultural client base there are bound to be differences the way others will look at closing projects and timelines. Cultural differences may also define the timeline of developing relationships while working together. While Asian cultures would prefer to develop a relationship right at the beginning of working together and suing this camaraderie to complete the work together, European and American culture prefers to initially focus to complete the work and later with available time to cultivate a possible relationship. 4. Difference in style of making decisions How decisions are made and how information is collected to support them also has cultural difference. While many Indian or European managers would like to keep projects on which they are working to be confidential and collect all information discretely before the entire work is made public, here the importance is for the decision to be identifying with a person, the average American counterpart will segregate work and hand over to specialised subordinates for them to work upon individually. Later he will collate all the present it as a complete report for decision making. Japanese corporates prefer building a consensus over differences rather than preferring personal decisions. 5. Differences in attitude towards norms of disclosure 135 CU IDOL SELF LEARNING MATERIAL (SLM)
Some cultures are open to disclose reasons of misunderstandings or conflicts while some may prefer not to share with others. It is therefore important to understand the preferred way while dealing with cross nationalities, asking too many questions to those who may not be comfortable may cause them discomfort or not disclosing to more frank ones may lead to suspicion. 6. Differences in gathering information The people prefer to know things and build information is also a cause of difference among cultures. While Europeans prefer building knowledge by comparing the validity of source, people on African continent will concern themselves with the imagination of its matching the wavelength of what they need. Totally different is in Asian culture prefer to both the validity of source as well as getting the whole information and it being perfect by their standards. The presence of difference among cultures is not an indication of them being either right or wrong, it’s just how people consider them to correct in their own way. What’s important is to understand the way people expect you to present yourself towards them or understand their way of reaching out to you. Over recent years people have started to try to understand the cultural differences by paying more attentions to what was being done before. 6.2.3 Challenges of Cultural Difference in International Business There can be major three challenges to the way international business is conducted due to cultural differences. 1. Personal Challenges: there can be many personal challenges due to cultural differences. Anxiety and stress can be the most common reactions while working in foreign culture. When confronted with difference, people feel challenged and close themselves believing that this will help them with the situation. However this is a cause of more damage than help as this an emotional response to a person’s failure to recognise cultural difference and find the correct way to deal with the situation. Closing oneself from the world will have detrimental effect on the mental health and well-being of the person. Such people may also experience physical discomfort like headaches or exhaustion. Inability to deal with personal issues due to cultural differences may lead inefficiencies and if experienced by senior staff may even lead to failure of international business projects. 136 CU IDOL SELF LEARNING MATERIAL (SLM)
2. Cognitive Challenges: deal with how a person thinks, his ability to process information and the way he views surroundings and the world at large. Prolonged working in foreign environment may cause significant cognitive challenges. This usually happens when expats fail to appreciate that there can be differences in the understanding of time and relationships due to cultural differences. Different cultures have a variable importance to both these aspects. An executive coming from a culture where maintaining relationships take precedence over punctuality towards time may fail to recognise the importance his local colleagues may give to time, he may be even considered incapable or inefficient by them. On the other hand someone with high resonance towards time will be considered inconsiderate towards employee emotions. In either way the event causes cognitive dissonance, where both the sides are looking at each other through ‘cultural filter’, that is they are interpreting the other’s behaviour through own perception. 3. Practical Challenges: relate to the practical aspect of work. Everyone has been programmed by our culture to perform his work in a particular way. We all know what is the correct or incorrect way of deal with customers, or make a presentation or even sit in an interview. These cues are so natural that don’t even realise that these is the role of culture behind these actions. Two managers in the same company and from the same culture can have totally separate views towards authority and providing direction. This can further be amplified if both the person is from separate cultures, as in that case the differences will unknowingly be attributed to cultural differences. Therefore as evident cultural differences have a profound effect on the conduct of international business. Presence of two or more differing views, opinions, assumptions or presumptions can lead to negative results due to a lack of proper understanding between the two parties. This leads us to the next topic of exploring the importance of cultural awareness. 6.3 CULTURAL AWARENESS As we have seen that two cultures are distinct in their identity and each one is identified through its own structure. In this scenario it is entirely possible to make unknown mistakes while dealing with people of different cultures while the intentions could be totally otherwise and clean. Therefore, there is growing need of Cultural Awareness among corporations whose business entail them to deal with multicultural customers, investors and even employees. It is also important to be aware of other culture to understand the difference in attitudes and values of the people with whom one has to deal with. Cultural awareness work both ways, how do you perceive the cultural of the target audience and secondly how they perceive you as per their cultural codes. Companies may invest to 137 CU IDOL SELF LEARNING MATERIAL (SLM)
understand the culture of the target market but that’s just half the part, it is as important to understand how they are identified by the local population. Maybe a community would be having a high inclination towards business and the foreign company has rightly identified the same. But when it comes to foreigners approaching them to raise capital, they may not be very agreeable to the idea, it could be seen that their nations wealth is moving to some other hands, or they may not be so much open to the end use of their wealth. To develop an understanding of culture is necessary as it is easy for businesses to undermine its importance which is certainly a recipe for things going wrong. Companies may invest money and resources in innovative products and business ideas, but if fail to be aware of the cultural peculiarities in new destinations they may find rejection and even loss of investments that would be detrimental to the larger interest of the business. The cultural elements of values and beliefs are unseen are the hardest to be recognised and understood. Cultural awareness therefore helps to reduce incidents of bad decision making and improves the chances of more insightful and considerate decision making. As a conclusion, following are the seven important reasons for cultural awareness: 1. While in an effort to understand others one finds oneself in a situation to appreciates own culture 2. It may increase awareness of positivity in other cultures and help reduce own cultural myopia 3. Improves acceptance levels and allows to better empathise with fellow workers 4. Better understanding of other leads reduction in being judgemental about other cultures 5. Planning through better cultural awareness avoids making mistakes and errors, prevents loss of time in distant lands 6. Prevents mis-communication and improves collaboration among the team 7. Mixing of two cultures leads to improved creativity and innovation for better ideas and growth of business 6.3.1 Cultural awareness for the African continent Similar situation is currently happening in the African continent. The African nations are currently on the cusp of growth and need foreign capital, both Chinese and Japanese companies are bullish on the business potential of the continent. The aim of Chinese firms’ investment is more towards exploitation of the natural resources and to support that they are investing heavily in infrastructure of these countries, roads, bridges and even ports which will aid export and import potential of these countries. On the other hand, the Japanese investments are focused to improve the livelihood of the people, they are investing not only 138 CU IDOL SELF LEARNING MATERIAL (SLM)
in industry that creates mass employment but also to support societies like, healthcare, education and social security. Both investor countries are working in ways that will benefit the African nations, but their perception about the needs of the locals is different. Chinese investments will provide immediate prosperity to these nations and maybe help them address their balance of payment problem; the infrastructure built will be used by the local countries even when the Chinese companies leave. On the other hand the Japanese investments may not lead to such immediate gains but the effects will provide internal strength to the countries and the effects will be felt for long term even with future generations. This is an example of two nations have having different perceptions about the needs of the African countries and the path chosen to bring growth and development to the continent. 6.4 CROSS CULTURE IN INTERNATIONAL BUSINESS Cross culture is the phenomenon of staff of companies working in different countries of cultures and the efforts of the company to ensure that they effectively communicate effectively among each other. Cross Culture is the recognition of working in varied backgrounds with common interest. The differences could be simply verbal or in values or way things are done differently. It is also known as Intercultural business, with coming together of people from different cultures which has become quite inevitable due to spread of globalisation. 6.4.1 How Cross Culture Works With the growth of business due to globalisation, executives regularly need to interact with cross border partners. This is for finding new markets, or sources of better supplies, it could also for search of more skilled manpower. Training to work in cross culture environments is a vital part for business. An interesting part of cross culture is that many advanced countries with military presence in other countries make sure to train their soldiers and military officers also in cultural nuances of the places where they will be posted. Cross culture training is both ways, first companies need to train their own staff who will be moving to places of different culture, another interesting part is training those who have come from others cultures into your own. Cross cultural linkages work both ways, home country staff moving outside and dealing with their subordinates in foreign lands and outside people coming in and they may be reporting to the local senior staff. One way of making increasing the effectiveness of Cross Culture is by ensuring regular communication happens between local and expat executives and similarly all channels of communication are open and functional between companies. The cultural gap can best be filled in through regular and smooth communication, to raise objections on time, to provide 139 CU IDOL SELF LEARNING MATERIAL (SLM)
solutions on time, to clear doubts on time. Similar raising requirements and response to these should also be timebound. Levels of communication should also be clear with clients, suppliers, government agents, and any other body that may be associated with the company in the foreign market. It is important to remember that the company is operating in alien territory with marked cultural differences, delays in providing response will be sign low ethics in front of the local population. The other reason is also to build a good and better image as compared to the local competitions, by keeping communication open and providing timely solutions sends a positive signal to the locals of good and ethical image. The company has nothing to hide and does not shy’s away from accepting responsibility and providing responses. 6.4.2 Kinds of Cross Culture effects Business roles: Cultural differences may have a direct effect on the way business is conducted in different cultures. Closed and patriarchal societies would demand all decisions to be made by the core board or by the leader, while more flexible ones would prefer a more democratic way of dealing among each other and also in decision making. Similarly many cultures may not like women to be present in more frontline roles and if their business partners send women representatives it could be a discomfort for both the parties. Since culture cannot be changed merely by corporations, the management needs to be sensitive to such small details before planning interactions and even policies for operating in places of cultural diversity. Business Law: Culture has a massive impact on law in general and corporate law in particular. Where certain provisions may seem to be far reaching in a culture, the same would be considered to be inadequate in other places. Examples could be ways in which Directors are made accountable to the stakeholders, emerging economies may try hard to bring parochial promoters under close scrutiny through years of efforts, while the same would be ineffective in countries where awareness about shareholders rights is developed. Companies operating in multiple cultures and countries need to have legal consultancy form local experts on such details, this will surely help them integrate to the foreign cultures. Language: These are the most common points of differences and can be easily overcome through training the staff into foreign language and communication skills or simply by appointment of translators. 140 CU IDOL SELF LEARNING MATERIAL (SLM)
6.4.3 The Advantages and Disadvantages of Cross Culture Slow growth of developed countries Even advanced countries are facing the crunch of demand, the average growth rate of such countries is not more than 2%, considering the sheer volume of their size the total effect is huge but in terms of net growth this is not a very encouraging sign. If they do not make them to be higher number, they face serious issues of being challenged by new growing economies of India, Malaysia and Brazil. Therefore, they need to expand their operations, and what better way to enter a new market than to first study its culture and understand the ways people make purchasing decisions there. Depletion of natural resources The level of availability of natural resources in many countries is quite low to meet their own demands or to power their export business. This presents an opportunity to explore new sources of raw material and deal directly with local suppliers. Understanding local culture is an advantage here also, as there are other seekers of same resources and from same sources also, better understanding of culture, traditions and customs will allow companies to handle competition of raw material seekers effectively and establish their strong base Availability of specialised labour Today the world is aware of the strength of Indian IT labour, there is not major country where either Indian IT firms are not present in any form or staff of Indian origin are not working. This increase the benefit of host countries understanding the cultural details of Indian manpower and providing similar facilities to them in their own countries to make them comfortable and ensure that they do not leave the country to move to possible competitive markets. Availability of cheaper production facilities Following the Chinese model of cheap manpower, today countries like Vietnam and Philippines are also major manufacturing base for western countries. Even India has a vision for Make in India. Previous examples were Korea, Taiwan and Japan. This is an advantage of cross culture understanding of the requirements of sourcing countries and designing the local production facilities to suit their global interests. Ease to move human capital In service industry like insurance, consultancy, IT, investment banking movement of human capital in much easier than shifting entire production facilities as in manufacturing. A group of professional who have made significant contributions can be shifted to new markets to simply replicate their success. While the staff also get more exposure the company will only have provide them training on the cultural experience of working in a new environment. 141 CU IDOL SELF LEARNING MATERIAL (SLM)
6.4.4 The Disadvantages of Cross Culture As human nature culture is diverse and grows upon a community. It is not an easy task to fully understand the intricacies of some other culture. The disadvantages of being Cross Culture emanate from the same fact. Companies spend fortune to understand the mind set of their local consumers and many times fail in judging their expectations, leave alone working to meet the expectation of foreign markets. The disadvantages do not mean the harms which may happen directly to a company but these are the added pains of their decision if choosing to be cross cultural. Cultures are shaped through a mix of complex behavioural patterns affected by social, political, economic, family values. Parts of these cultural aspirations are reflected in the business background for the community. As we have seen earlier, role of board members, or shareholders rights are in way shaped by cultural values. In terms good governance also emerging economies may be more culturally aligned to continue with the existing corporate structure of family values if the promoter guiding the working styles of the executive and the company as a whole. Cross cultural risks also involve the outlook of the local populace towards outsiders. Many societies have rather suspicious or unwelcome attitude towards outsiders, they may also be protective of their culture to be followed by anyone else then their own. In this case if the MNC tries hard to get close to local customs or traditions it may face open challenge from the community which would see this as an attempted invasion on their private lifestyles. There can be moments of cultural invasion where the oriental cultures would feel threated by the more open outlook of the western culture in terms of mixing with the opposite sex. Beach parties, cocktails or social events conducted by foreigners are considered not a good sign on the locals specially the younger lot is felt to be most threatened of losing their values upon such invasion. Cultures bounded by strict religious principles are the most rigid in either reaching out to others and certainly forbid others to explore their private domains. Cross culture also attempts to explore the somewhat forbidden spaces of body language, initiate physical contact and the way personal space may be viewed by local cultures. Reading these lines may sound offensive but it may be acceptable in other societies. Diversity due to different cultural backgrounds among team members working on common project can lead to difficulties and risks. This could be due to different perceptions in meeting deadlines, providing feedback and most important taking punitive action against defaulters. A manager working in a different culture should be aware how to deal with delinquency with local subordinates, that would prevent any of his disciplinary action being viewed as unjust by the local staff. Differences in cross culture led to issues related to etiquettes at workplace, 142 CU IDOL SELF LEARNING MATERIAL (SLM)
norms, behaviour, way of expression, personal values and even religious sentiments. Not just at the work place these issues have the potential to effect relationships at top management level, raise questions about corporate culture and ethics of both cultural partners, marketing strategies to reach out to customers and even at HR related issues. Some examples of Cross Culture: An American may just hand over his visiting card but for a Japanese it is mark of honour, to be handed out with both hands and slightly bowing down to show your respect. People who may not know the reason behind this may find it a bit awkward while the Japanese being handed over a card with a carefree attitude is an insult to his identity. Similarly, an Australian may want a cleat yes or no answer from his client, something we in India also would like, but for a Chinese demanding a clear yes or no is a rude action and may result in breaking the deal. They may need more time or may answer a no in a more subtly way of their choice. Mexicans prefer to deal with family members and friends or only with those whom they already know, any new person wanting to business there will need to get a connection validation through a person know to the locals. Needless to say that failure to respect and observe any local customs may result failure to sign deals. 6.4.5 How cultural differences impact international business Global companies continue to move across borders building a greater international marketplace which becomes accessible to large and smaller players alike. Working across borders brings in more opportunities than ever before to MNCs and Cross Cultural teams to benefit from a growing base of diverse knowledge. This diverse knowledge gives rise to innovative approaches to solve business problems. Along with the benefits of being cross cultural there are also limitations, some of which we have come across in the previous section. While culture is a set of common norms accepted and shared within a society, in the context of international business common and accepted norms can be totally different among people of different cultures. Understanding of three major areas while being cross culture will help avoid misunderstandings with international partners and will lead to develop a strong global business environment. 1. Communication Many cross cultural companies depend upon English language when it comes to communications between cross border partners. While this may remove the requirement of depending on translation there is high possibility that message may get distorted while being read by non-English speaking readers. However when it comes to dealing with 143 CU IDOL SELF LEARNING MATERIAL (SLM)
lower level executive or with workers a non-native manager or supervisor maybe at a loss due to language issue as most of lower staff may not be well conversant with English language, it that case he will have to solely depend upon a local translator. There is even a better way to get your message passed on without knowing the language and that is through the demonstration effect. Aspects like punctuality, following time lines, tam building, non-conformance to corrupt practices can all be very well demonstrated through self-practice and restraint. Non-verbal gesture also will act as letting you emotions speak when language is a barrier. 2. Workplace etiquette The way employees behave at work is called workplace etiquettes. This could also be variable as per cultures. If an expat manager wants enforce stricter etiquettes he may resort to putting up information boards in local language to create wider awareness. There could be differences in the way staff are addressed, do people prefer tiles of Mr. Wong or just through first name – Wong. Similar is about punctuality, English and American may give high preference to being punctual but Italians or Mexican have slightly relaxed attitude to this. Similarly there can be difference in attitude towards rules and regulations, for some rules are Rules, for other they could be just rules. Even working extra hours could completely fine Americans or even Indians but the French prefer a four day week. Some differences in workplace etiquettes are depicted in the graphic given at the end of the section. 3. Organizational hierarchy Observing organizational hierarchy and attitudes towards management levels also varies between cultures. Cultural norms dictate when or how or not those in middle- management or junior levels should speak in meetings, whether they can question their seniors or raise objection to decisions, or are they allowed to express differing opinions. Such attitudes are a reflection of the country’s societal values and level of social equality. For example in Japanese put great value to social hierarchy, relative status and respect to senior colleagues. Such culture believe that hierarchy helps define roles and responsibilities across the organization. This implies that those senior management command more respect and similarly expect formality in behaviour and esteem from junior colleagues. Some countries, especially Scandinavian ones prefer to have comparatively flat hierarchical structure, which helps in informal communication and mutual respect and most important cooperation across organisations. 144 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 6.1 Fig 6.2 Image courtesy: https://www.ctbusinesstravel.co.uk/news/blog/business-etiquette-around-the-world/ Cross-Cultural Challenges for International Business Management Certain issues that are generally noticed in teams composed of multicultural participants: Suspicion over trust – The biggest cause of mistrust or suspicion in mix cultures is the use of different languages, while is meeting being attended by people of mix nationalities if two staff of common origin speak, even briefly, in their local language this considers inappropriate and may be untrustworthy. Perception – people move to locations of different culture with a pre-conceived notion that those in foreign lands may cheat them, this most common with Europeans 145 CU IDOL SELF LEARNING MATERIAL (SLM)
travelling to eastern countries, this forces them to avoid trusting anyone. Besides there is a perception of moving from superior to inferior cultures. In-correct biases – similar to perception there may be bias among nationalities, that may prevent assigning responsibilities to cross cultural teams. Senior managers may prefer local executives over expatriates while assigning higher responsibilities, either due to mis-trust of the culture or that they expat may leave the country any time and back. Inaccurate communication – use of correct words in an improper ways or making incorrect gestures may also lead to misunderstandings among multi-cultural teams. European managers may not be as forthcoming as sharing their feedback to subordinates as people from Asian or African origin are used to receiving from their superiors, static words uttered by them as response may not be fully understood by staff from other cultures Disregard to hierarchy – totally unintentional, but mistakes happen in terms of hierarchy, while American team members may take any chair in a conference room when it comes to Indian or Chinese they will always ensure that the senior most person taken the lead chair and as per seniority other managers will sit next to him. Americans may see it as time consuming to arrange seating, while the Asian may see this is highly inappropriate. Rule vs Relationships – While eastern cultures give more importance to relationships over contracts and terms. While contracts may protect the interest of both the parties Japanese partners may first look at how much the other party is trying to build a relationship with them. Respect to Religious ideas – many cultures give prime importance to religious sentiments, which also change over time. Although Indians are considered more religious and consider images of gods as auspicious, but use of deities to promote products is not a good suggestion as it may lead to disrespect. Similarly there needs to high sensitivity about use of food products and restraint from promoting a particular foods where they may be prohibited by local culture. Cross cultural challenges is not only a human resource issue, non-clarity about the culture of the local country may lead to business failure also. Barbie dolls could not sell initially in Japan, as the dolls had more the European features and Japanese mothers considered it to be an invasion to their culture. 146 CU IDOL SELF LEARNING MATERIAL (SLM)
Walmart was a failure in Korea as it failed to understand that the Koreans preferred to buy smaller packets over short durations as against the American way of buying is bulk to last for longer period. Coca cola faced similar issue when under the marketing strategy of ‘Share a Coke’ it started printing popular names, this came into objection when Arabs noted presence of Israeli names in absence of Arabic names. One of Toyota’s best seller ‘Fiera’ was rejected in central America as in local language Fiera is an ugly woman. ‘Come alive with Pepsi’ was mis interpreted by Chinese and bring back the dead. This brings to importance the awareness of ethical issues while presenting oneself in a foreign country. Knowing and understanding the minute issues of culture and local ethics is as important as making a strong business plan to be operational in a foreign country. In addition proper etiquettes and respect to customs is also a valuable suggestion to those who either wish to conduct business deals in foreign lands or be part of team that is engaged in such activities. 6.4.6 How to overcome challenges of Cross Culture Challenges in understanding Cross Culture sentiments is topic that has aroused keen interest among the international business community. Failure to properly understand cross culture has resulted in failure of many business ideas, which were successful in home countries and even in other countries where they did not hurt cultural sentiments. Every company with an aim to for global operations by dealing in cross culture needs to support the idea with proper planning, it may be better to take help of professionals to relieve the pressure on the executive to tide over these challenges, this also help the staff to focus better on their own work. With the growth cross cultural workings, many specialised firms provide consultancies professional guidance to staff ready to move to different locations. They also lend services for solving conflicts and managing risks that may require understand of local culture. Accounting experts A good suggestion is to a dedicated team of accounts and finance to deal with accounting issues while dealing in multiple countries. Each country has its own different system of maintaining accounts, therefore a appointing a specialist who may understand the international accounts standards will be good idea to reduce conflict in this area. Sensitivity training 147 CU IDOL SELF LEARNING MATERIAL (SLM)
To handle this issue companies are budget to do a sensitivity training for executives who need travel abroad or who are responsible for make deals with foreign partners. This training would cover aspects of country specific values, customs and religion. There are even independent consultants who will train such staff on the peculiarities of foreign culture and lastly some websites also offer paid guidance to on the subject. Such training can help reduce the misunderstandings about foreign cultural. Human Resource Department: The HR will ensure first to find local talent and in case such talent is not available it will from its record find the most suitable person to be trained and sent to international location. It will also ensure to make the remuneration worthwhile for the person to take such an assignment. Role of HR to conduct a proper cultural analysis is quite important and help to identify the correct person for the job. Group-Building: Conduct of group building exercises are important to train people how to interact while operating in places of different cultures. It could include learning the language, finding the likes and dislikes of people they are deal with, even the type of gifts that they may like. Public Relation Department: Companies can also conduct repeated Public Relation activities to build their brand name and image in foreign lands. Strong brands associated with companies and even with staff improves their confidence of dealing work relates pressure and anxieties, it also improves the acceptance of ideas among the local population. Many of the above solutions have been adopted by companies to decrease cultural conflicts and challenges of working cross culture. Ignorance towards cross cultural challenges during process of managing international business can be risky to the fortunes of the business. It is similar to the ‘Hygiene factor’ of the theory of Fredrick Herzberg. While understanding cross culture may not guarantee business success and survival but ignorance towards it will surely lead to failure of business and stagnation of growth plans 6.4.7 Key Takeaways of Cross Culture It is a concept which recognizes the differences among people of different nationalities and ethnic backgrounds, while doing business Cross Culture considers bridging differences to be important to conduct business. The need for cross culture education and training is an emerging area for businesses who seek to operate in different countries and regions. 148 CU IDOL SELF LEARNING MATERIAL (SLM)
Corporate employees need to be sensitive to demands of local culture to win the support of the local population and also need to tone up or down their demand styles to match the local customs and traditions 6.5 CULTURE SHOCK Imagine fresh graduate from a small Indian town getting his first job in Singapore. The city is considered to be a cultural meltdown of various communities Indians, Chinese, Malaysians, Sri Lankans and Australians walk on the same road and share restaurant tables. Our new boy, who may have been in a protected environment of his small town will be overwhelmed by the diversity he will see at every step. He will totally at a loss to know how to deal with a Sri Lankan shop owner, or Malaysian HR manager, there will be so much differences in their working styles and the way they may want the new boy to respond. This is an example of Culture Shock, which is when a person is uncertain, confused or overly anxious in his dealings when he / she is suddenly transplanted in an unknown society. This may also happen when you go to a new destination for a vacation or even for pursuing your studies in a foreign land. The root cause of such a shock is your unfamiliarity about the look of the people, language, food habits, gestures they make and even transaction styles. Any amount of training done is not sufficient to protect a person from such shocks. 6.5.1 Understanding Culture Shock Cultural shock is not only due to changing locations between countries, in a country like India itself there are immense differences in all aspects between states and regions. Therefore for any government official getting a transfer from Tamil Nadu to Assam the biggest worry would be education of his children, how easy it would be find school teaching the same syllabus or maybe if he is able to find that, the native language, weather and even the food in the school canteen and the sports at school would be a shock to the child. The further a person travels, greater would be the intensity of shock. But as with human behaviour of perseverance and adjustment, such shocks will be dissipated over time. As the new executive in Singapore or the new boy in Assam spend time with local people, learns about their customs and sees it as a normal behaviour both will start feeling comfortable to the new surroundings. The same alien environment will soon covert to more friendly surroundings. Therefore, there is nothing wrong of feeling challenges initially, any decision to go back or leave the opportunity would be loss for the future. 6.5.2 The Stages of Culture Shock There can be four distinct phases of cultural shock, although it is not necessary that each individual will pass through all of them. Depending upon the capacity of person to adjust his 149 CU IDOL SELF LEARNING MATERIAL (SLM)
ability to commit time to the process will determine how far he will go on to remove the shock or in a way remove himself from the situation. The Honeymoon For many people the sheer excitement of being in a new place is enough to make them feel provoked to enjoy their initial part of the stay, each new experience adds to their thrill. For those on short vacations or business trip this their entire experience and they would always recall it with excitement. But if the short business trip is converted into a temporary transfer things may start to become difficult and the initial honeymoon will be over. The Frustration stage As the initial excitement wanes off and lives begin to take. Normal turn of repetitive behaviour, the person begins to miss his natural surroundings, food, companions. The initial excitement of meeting new people turns to fatigue and a daily challenge. The frustration is due to realisation of a prolonged stay and that person in not able to make himself keep excited as the environment now fails to offer anything new to be discovered. It such a situation it is best to focus on the work for which the person has travelled far. If the transfer is project based all effort should on completing the give work without errors as that may further prolong the stay. While if stay is much longer its best to try to amalgamate with culture, in this situation when people try to keep themselves aloof the local culture will not be able to survive for too long in new environments and cultures. The Adaptation stage With realisation of being in the new place for a longer duration it is normal for the person to try to adapt to local cultures. There are many trading communities in India who are found in every corner of the country and who have made that part their home. This allows prosperity to set in and people start taking benefits of their surroundings. The Final Acceptance stage This is how cosmopolitan cities like Singapore, Hongkong, Dubai and more closely Mumbai thrive. The travelling communities make the new destinations to be their home. It’s not they either forget their culture or fully understand the culture of the new place. They realise that full understanding of the local culture is not necessary to prosper, but with higher familiarity of the new surroundings they accept the differences and make them work for their benefit. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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