By Georges Nurdin, senior lecturer at ESCP-EAP European School of Management. This is the first of a series of three articles on the effects of cultural differences on management accounting.
In the global business world, standardisation of tools and instruments is seen as a prerequisite for success. The theory is that the greater the commonality, the better the spread of information and economy of scale. Over the past decade there has been huge growth in the use of universal tools and approaches, particularly in accounting, controlling and planning.
This approach has become the norm but we should not forget that markets and companies are made up of people, who organise themselves according to their cultures.
Here comes the big question: are cultures universal or are they diverse? After a debate lasting around 6,000 years, the first scientific answer was provided in the late 1970s by a Dutch scholar, Geert Hofstede. He surveyed more than 200,000 people worldwide and analysed the results.
Hofstede came to the conclusion that more than 85 per cent of national cultural traits could be identified and measured along five fundamental dimensions. The four relevant to business are power distance, uncertainty/ambiguity avoidance, individualism and the time horizon and he gave each country a score for each dimension.
Power distance
There are flat organisations, where power is linked to the function rather than the individual (characterised by a short power distance score such as Denmark 18, Norway 31, or Sweden 31) or, conversely, pyramidal companies where the power lies with the individual (the chief) and where the hierarchy is built up on many sub-layers. High power distance countries included Guatemala with a score of 95 and Mexico with 81. The UK scored 35, the US 40 and France 68.
Uncertainty/ambiguity
Some cultures hate uncertainty. They need every single detail to be spelt out and choose detailed contracts or over-engineered forecasting models. This is the case with Japan (112) and Portugal (102). Conversely, some cultures are not bothered about detail and control. Among the more relaxed nations are Denmark scoring 32, Sweden with 23 and Hong Kong with 29. The UK scores 43 and the US 36.
The implications of the two above dimensions can be seen in business cases taken from the practice and observation of F Cuisinier, group financial controller of Sodexho Alliance. This is a service company employing over 308,000 people (40 per cent in Europe, 40 per cent in North America and 20 per cent in the rest of the world).
Through a statistical analysis of forecasts received from all parts of the group, Cuisinier identified patterns in forecasting behaviours. He found that cultural attitudes are one of the major factors in interpretation of all forward-looking information produced within a worldwide company. For example cultures where power is associated to the function involved (not the individual) and which are not bothered by uncertainty provide forecasts which are factual and could as such be qualified as spontaneously transparent.
In such a culture, any significant new event will be directly reflected in the forecast, whatever the magnitude of the impact. The need to take corrective actions as a consequence of the event and to evaluate their potential impact are rarely taken into consideration when preparing the forecast. Nordic and Anglo-Saxon countries provide this type of straightforward and uncommitted forecast.
Cultures where power is associated with the individual and which tend to avoid uncertainty provide forecasts that show smooth trends in the update of forecasts and could be described as subjectively transparent. The impact of a new event will be reflected only partially in the forecast. But it will also include the impact of the actions that are planned in order to reduce uncertainty created by the event. Latin countries provide this type of personalised and committed forecast.
In a global corporation such as Sodexho Alliance forecasts and budgets are far from uniform. This is despite the fact that the tools, systems and rules are uniform. Soft factors, in this case culture, take precedence over the hard factors like the systems.
In Sodexho Alliance forecasts in Latin cultures, a hit or negative deviation versus the budget is not reported immediately to its full extent. Instead the gap is smoothed out over later periods, to cushion the negative impact.
This is because, in Latin culture’s power distance dimension, it is not acceptable for a manager not to know what to do. Therefore bringing raw bad news with no contingency plan is a form of incompetence. The management will therefore dilute bad news, while a recovery plan is developed.
In Latin culture, uncertainty avoidance is high. Showing the crude gap in the forecast is equivalent to recognizing that the future is unpredictable and not controllable. That is culturally unacceptable.
Anglo Saxon subsidiaries would report the same negative deviation immediately and in full. This is because the same cultural dimensions - power distance and uncertainty avoidance - are working in exactly the opposite direction.
This example shows that reporting management on a worldwide basis does not require only technical skills. It needs an understanding of differences in cultural attitudes to interpret correctly the numbers and the risks and opportunities associated with forward-looking information. However, power distance and uncertainty avoidance are not the only cultural dimensions to be understood and monitored by controllers.
Individualism
In some cultures the individual comes first and the group is not a strong part of society. This is the case in the US, with a score of 91, Australia with 90 and the UK with 89. On the other hand, some national cultures see the group as an efficient building block around which society is constructed – Taiwan scored 17, South Korea 18, Thailand 20, Singapore 20 and Hong Kong 25. In the business world this would indicate that Anglo Saxon corporations are more likely to favour individual champions, whereas Asian organisations see efficiency through collective effort.
This is significant in terms of management accounting and controlling since most if not all Western systems, approaches and philosophies are aimed at singling out individuals or individual business divisions. Think of the potential cultural clashes over activity based costing or management, for example.
Time horizon
This is probably the most obvious cultural differentiator but one that is not really recognised in accounting. Time has different values and structures for many countries. China, Japan and Korea, for example, take an extremely long-term view (scoring respectively 118, 80 and 75) whereas Canada, the UK and the US are at the other end of the spectrum favouring a very short-term horizon (respectively 23, 25 and 29).
The implications for business are clear, in terms of strategy formulation or attitude towards investment, as well as the very structure used to measure performance. All accounting systems are based on fixed time periods – the fiscal or business year. We use accruals and deferrals to push forward or pull back events into a different time period than the one in which they occurred. This is natural for about 20 per cent of the world's population – in other words, North America and Europe – where time is scaled, limited and regular in quantity and always moves at the same speed.
For the remaining 80 per cent, time is of a circular nature. It comes and goes and comes back again like a wheel. Time is not scarce but abundant. Neither is it quantifiable. In these cultures slicing and dicing time into equal portions where each event must first be seen as discrete before being placed in the right period does not come naturally.
With increasingly universal tools and instruments, more global standards and fewer systems that are designed to accommodate a greater variety of situations than ever before, the accountant or financial director faces having to develop an increasingly universal set of skills to guarantee their employability worldwide. This means that they are having to operate beyond their cultural boundaries.
With such profoundly different cultural attitudes across the world, the only way to successfully conduct business globally is not to ignore these differences but to learn about them and incorporate them into daily business life. So how can the accountant, controller, CFO, or FD learn about cross-cultural management? The answer is with difficulty. At the moment it is only taught in a very few advanced business schools, mainly in mainland Europe and India, where they are perhaps more conscious of diversity as a key business factor.
October 2004
