National Culture, Formal Institutions and Structure of Board of Directors: Theory and Empirical Evidence

Abstract

Purpose: This study aims to explore how the structure of the board of directors is influenced by national informal culture values and the strength of formal institutional environments, as measured through legal regulations, market conditions and investor protection regulations.

Design/methodology/approach: This study analyzes data from 432 companies listed in the S&P Global 1200 index using structural equation modeling. National cultural dimensions from Hofstede’s (2011) framework capture informal cultural aspects, while the World Bank’s Worldwide Governance Indicators assess formal institutions. This study examines board structure in terms of leadership style, board size, board independence, board committee structure and board diversity.

Findings: The results reveal that national cultural values are negatively associated with rule of law institutions, indicating that culture can substitute for legal institutions, acting as “soft” regulation. Cultural values establish social norms and accountability when legal frameworks are weak. In addition, national culture positively relates to open market institutions, enhancing transparency, fairness and competition in strong markets. The findings also show that national culture and formal institutions significantly shape managerial perceptions of the board’s role and structure, impacting how firms prioritize monitoring versus resource provision.

Research limitations/implications: The findings offer valuable insights for managers in diverse institutional contexts, enabling them to adjust board structures according to cultural and institutional factors.

Practical implications: The research advocates for tailored governance practices that fit specific institutional and cultural contexts. Multinational corporations can benefit from customizing their governance structures according to the cultural and institutional environments of the countries in which they operate.

Originality/value: This paper contributes to existing literature by focusing on complementarity as well as substitution mechanisms between national cultural characteristics and formal institutions in shaping board structure.