How National Culture Affects Risk-Taking in Corporations
By Becky Kramer
Americans take pride in their rugged individualism. As part of our national culture, we praise individual achievement and encourage children to distinguish themselves by standing out from the competition.
Japanese society puts a higher value on knowing how to behave in a group. The collective accomplishments of group members are prized over individual achievements.
Researchers are starting to delve into how a country’s culture affects decision-making in corporate board rooms. For her doctoral thesis, Susan He set out to measure it.
“National culture often guides how managers act and how companies make decisions,” says He (’19 PhD Fin.), who recently earned her doctorate in finance from the Carson College of Business. “We all have backgrounds, and we’re all influenced by our backgrounds.”
He zeroed in on risk-taking in the insurance industry for her thesis. She found that U.S. cultural traits generally were associated with higher levels of corporate risk for insurance companies, while some traits in Japanese culture promoted less corporate risk-taking.
“Risk-taking behavior is affected by culture, although we’re not making a judgement about whether risk-taking is good or bad,” He says. “Sometimes, you have to take certain risks in life, but taking too much risk might get you into trouble.”
Larger companies can mitigate influence of culture
The doctorate is the second for He, who has accepted an offer to teach finance at WSU Vancouver in fall 2020. She previously taught economics at WSU, where she focused on econometrics—the use of statistical and mathematical models to describe economies.
“Susan brings a great perspective and an exceptionally strong background to her research and teaching,” says David Whidbee, chairman of the Department of Finance and Management Science. “We’ve enjoyed having her in the PhD program, and we know that she will be a great addition to our Vancouver faculty.”
As she was looking into cultural influences on corporations, He selected the insurance industry for her research because it’s highly regulated, making company comparisons more relevant.
“We also wanted to focus on large companies in highly developed and globalized economies, which would have sophisticated managers,” He says. She worked with Gene Lai, professor and James J. Harris Endowed Chair in Risk Management and Insurance at the University of North Carolina, who chaired her dissertation committee. Lai is a former WSU faculty member.
They studied insurance companies with $100 million or more in total assets in the Group of Seven Countries: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
The countries were ranked on six traits frequently used to describe national culture. Insurance companies were more tolerant of risk when they were headquartered in countries with high scores for individualism, indulgence, and masculinity—defined as assertiveness and competitiveness. The United States, United Kingdom, and Canada generally fit that profile.
Insurance companies were less accepting of risk when their countries’ national culture emphasized future rewards, avoiding uncertainty, and where people were more accepting of hierarchical power structures. Japanese culture had many of those attributes, while the other countries in the study fell in the middle.
However, the influence of national culture was less apparent at the largest insurance companies, He says.
“Our explanation is that larger firms have better corporate governance and management systems,” she says. “And if they are multinational firms, their managers may have diverse backgrounds.”
The research’s findings could be valuable to policy makers designing regulations for the insurance industry, as well as individual insurance companies, He says.
“If companies don’t want culture to affect risk-taking behaviors, they need to design management systems and have mechanisms in place to moderate that impact,” she says.