Paul Holmes 07 Dec 1992 // 12:00AM GMT
“A couple of years ago, the German government issued a new packaging degree," recalls James Lindheim. "It was quite radical. It basically demanded that businesses be responsible for collecting any packaging they had manufactured. In three separate instances, we had U.S. clients who hit the roof. They thought it was unbelievable. They wanted to fight it. They wanted to lobby. But when they spoke to their German managers, the Germans just didn't understand why they would want to fight it. Their attitude was that these new rules were going to be good for society, and so the company should support it."
Lindheim, chairman of BursonMarsteller Europe, tells the story to illustrate just one aspect of the cultural differences between the U.S. system of capitalism and the German social market economy, differences that can create serious public relations and communications problems for any company that expands internationally without familiarizing itself with the cultures of the countries in which it plans to operate.
Most business books, when they deal with cultural differences, tend to focus on the micro rather than the macro, on the details of day to day behavior rather than the very different concepts of the role of business in society that exist from continent to continent and even country to country.
Thus, while many American executives traveling and working overseas understand that they should not pat the heads of their host's children in Thailand, of bring gifts of food or drink to business acquaintances in the Middle East, or present a friend in Latin America with knives or scissors, they continue to be surprised by the relationships they are expected to maintain with their employees, and indeed local communities and governments.
Yet the fact is that the notion of capitalism most American executives carry abroad with them is very different from the way capitalism is practiced in the world's other leading economies.
"The competitive battle senior managers now face is not some kind of factory to factory combat with mirror image rivals in other parts of the world," says Herbert Henzler, chairman of McKinsey & Co.'s German operations. "Rather it is a deeper struggle among different capitalist systems, each with its own distinctive sets of values, priorities, institutions and goals. I believe that our capitalist system is, in many ways, better than its U.S. or Japanese counterparts to meet the economic, social and environmental challenges of the years ahead."
The success of the respective systems, Henzler says, will ultimately be measured not in terms of trade flows, productivity or exchange rates, but rather the standard of living each system provides for its people. This will require each system—and the companies that operate within them—to balance the need for economic growth with the broader health of the environment and the broader social welfare.
Writing in the Harvard Business Review Henzler offers this analysis of the three major capitalist systems:
"U.S. capitalism typically does not favor collective solutions to social problems, not does it expect institutions such as employers' associations, unions and government bodies to play an important role in the management of private enterprise. Basically, so long as shareholder value grows, managers can follow their own unrestricted course.
"Capitalism in Japan is far less individualistic than its U.S. counterpart. But it is also focused largely on private gain, although it is the company of keiretsu that benefits from current earnings rather than dividend-receiving individual investors. Japanese managers are expected to use profits to fund high and sustained levels of corporate investment, not to distribute them to shareholders or to company employees.
"We Europeans explicitly accept our roles as members of society who must act responsibly within the bounds of that society. In return, we also assume that society is, in the broadest sense, responsible for everyone in it. In this civic polity, jointly engaged in economic affairs, all sorts of people are bound together and responsible to one another."
Henzler acknowledges, by the way, that what he calls "Eurocapitalism" does not exist in a single common form: wage levels vary widely from country to country, as do labor legislation, social security provisions and the degree of unionization. The financial markets in the U.K. are clearly closer to those of New York than to those of Frankfurt. The country that epitomizes the Eurocapitlist ideal is clearly Germany.
A study by Fons Trompenaars of Amsterdam's Centre for International Business Studies presented managers from different countries and cultures with a series of dilemmas and asked them to choose between alternatives, one of which he defined as left-brained (verbal, analytical, and rational), the other of which he defined as right-brained (nonverbal, holistic, intuitive, and creative). The results are shown in the tables below.
In five out of six questions, U.S. managers were on the extreme right-brain end of the continuum. They were more likely than their counterparts in either Europe or Asia to believe that profit was the sole mission of the company, more likely to see the company as function-oriented rather than people-oriented.
The responses of European managers varied widely, with the Germans and British leaning towards a left-brain orientation and the French leaning towards the right brain. In almost every case, however, the two Asian-Pacific cultures represented—Japan and Singapore—were on the right-brain side of the equation.
Many experts believe that the left-brain, logical, analytical mindset that dominates English-speaking cultures will increasingly work against U.S. companies in the rapidly changing world of the 21st century. Charles Hampden-Turner, a consultant on corporate psychology and culture warns that it may.
"The evidence from business worldwide, and particularly the expanding Asian economies, is that the current climate permits the cooperative ethos to work more effectively," Hampden-Turner says. "As the world enters the information age of complex systems and subtle communications, only teams working together in intimate face-toface settings may be capable of learning and disseminating intricate forms of the knowledge required."
Perhaps the most dramatic illustration of the differing approaches to business in the U.S. and elsewhere is in the arena of industrial relations. In this sphere, research by the European Management Forum found a high correlation between the degree to which labor unions participated in management and the existence of "constructive and peaceful" labor relations, and a shift away from traditional hierarchical management in the world's most successful economies.
"Hierarchical behavior is becoming less and less appropriate in an environment where employees are required to exercise their own judgment and are being paid to do so," says Hampden-Turner. This, in turn, means that the skills managers need to bring to their job, and in particularly the communications and motivational abilities they require, are also changing.
"That change does not affect the existence of a hierarchy in which A is responsible to shareholders for how well B,C and D perform," Hampden-Turner agrees. "What needs to happen is that A exerts influence on the conditions, the atmosphere, the working environment and the reward structures within which B, C and D work."
John Paluszek, president of Ketchum Public Affairs, has argued that the U.S. needs to develop a more sophisticated system of social capitalism, suggesting that in some ways historical and societal forces—better-informed consumers, facing wider choices—make it inevitable.
Social capitalism, Paluszek says, is structured in three concentric circles: the first represents traditional corporate responsibilities such as providing jobs for employees, providing products and services for consumers, providing profits for owners and taxes for the government; the second calls for business to conduct its business with greater awareness of the expectations of these groups; and the third circle forces it to explore whether broad social problems, such as education, homelessness and racism, can be alleviated by corporate resources.
"Who should set the agenda for social capitalism?" Paluszek asks. "In a democracy, only consumers and voters should say how much extra they are willing to spend on such social improvements. Business's objective should be to inform the public on each proposal advanced and ask citizens to express their considered judgments to elected representatives. Traditionally, business has not been very effective in this arena. Worse, it has been generally perceived as opposed to progressive social legislation."
Most experts agree that the American model of corporate behavior is more confrontational and individualistic than either the European (German) model or the Japanese. In broad terms, one might also argue that in acknowledging the independence of various constituents and striving for harmony among them, the German model demands greater flexibility from its corporate management, while the Japanese system demands greater sacrifices from its consumers.
Roy Sabada, president of Japan Counselors, a Tokyo-based PR consultancy, identifies four Japanese management practices that set the country apart from the U.S.: life-time employment, promotion based on seniority rather than achievement, in-company labor unions (as opposed to the across-trade labor unions of the U.S.) and wide spread company ownership by banks, insurance companies and other corporations, as opposed to individual investors.
It was Takeo Fujisawa, cofounder of Honda Motor Company, who first observed that: "Japanese and American management is 95% the same, and differs in all important respects."
Sabada traces many of the cultural factors that set Japan apart back to the country's agrarian origins. Because the inhabitants of farming communities tended to be less mobile than those societies which depended on hunting or cattle, he says, Japan grew up as a society in which members viewed most human relationships as long-lasting: hence harmony takes precedence over individualism.
"Group consciousness in Japanese companies stems from the need to establish one's identity based on the group or groups one belongs to, not one's personal achievements," Sabada explains.
Because the Japanese value social harmony, Sabada adds, communication is often less direct than it would be in the U.S. Even if a Japanese executive disagrees with the views being expressed by another, he will normally respond with a "tatemae"—best translated as "the truth for public consumption"—rather than "honne," his true feelings.
Another Japanese characteristic is the tendency to give higher priority to process than to results. For a Samurai warrior, Sabada says, while winning and losing were important, even more important was the dedication to effort and the way in which he won or lost. This spirit permeates corporate life also.
"In the business world, relationships are established not so much in the wording of the contract but in the process leading up to it. How did the two sides exchange ideas? How did they negotiate and arrive at an agreement? These are the critical elements. Mutual profitability will not dictate the terms of an agreement. Mutual trust, faith and understanding does, to the point that there may not be any written contract at all between the two parties."
More recent history has shaped the relationship between Japanese corporations and the society in which they exist. Following the Second World War, Japan was forced to rebuild itself, quite literally, from the ground. There was a widespread attitude that individuals would have to make sacrifices for the economic good of the country.
In Japan and much of the Pacific Rim, not only are dividends to shareholders considerably smaller proportionately than they are in the U.S., but shareholders are treated as outside suppliers of capital, who must be paid off fairly: but the true owners of the corporation are those who work within it, and the interests of the corporation are defined by their interests.
As many as three-quarters of a company's shares may be held by other corporations—which will likely have been invited to become shareholders—so Japanese managers do not worry about short-term results. Koji Matsumoto, professor of policy science at Saitama University, says: "Japanese companies are controlled by and exist for employees. If forced to choose between skipping dividends to shareholders and laying off personnel, almost all Japanese managers will choose the former."
Roy Sabada concurs: "Managementlabor relations are not adversarial in nature in Japan, but rather structured for compromise. Therefore, communication on either side is not based on rights, but on shared responsibility. Management in Japan will take voluntary pay cuts in hard times in order to communicate their wish to maintain village harmony."
He recalls a recent case involving foreign capital companies in Japan which laid off employees and found themselves faced with a lawsuit, based not on legal rights but on the grounds that the company's management broke with social order.
At the same time, of course, Japanese workers put up with working hours and conditions that would never be accepted by their American counterparts, again in the interest of maintaining harmony and advancing Japan's national economic interest. The question that many outside observers have asked is whether, as more and more Japanese are exposed to lifestyles in the west, they will continue to tolerate the sacrifices they are asked to make.
Meanwhile, this striving for harmony among various constituencies extends even to the news media, a shocking notion to many Americans.
"Doing media relations in Japan is almost a one-way street," says Lucy Siegel, president of New York's Siegel Associates, which specializes in Japan-U.S. relations. "The media takes whatever information you have and publishes it. There is a contract between business and the media and government in Japan that creates a much greater degree of cooperation than is the case in other countries."
This led Ralph Nader to comment, following a recent visit to Japan, that "the Japanese do not have freedom of information." Roy Sabada agrees. In Japan, he says, information is very much top-down, without cynical scrutiny, although cynicism may be on the rise in the wake of recent political and corporate scandals.
"What American companies in Japan have to realize is that the corporation plays a much greater role in the lives of employees and their families and their communities in Japan than it does in Europe or the United States," says Siegel.
Konosuke Matsushita, founder of the giant consumer electronics company that bears his name, explained the relationship thus: "A business should stand on its own based on the service it provides the society. Profits should not be reflection of corporate greed but a vote of confidence from society that the firm is valued."
Research conducted by Japan's Economic Planning Agency among 1,000 U.S. and 1,000 Japanese companies (see table opposite) showed that American executives clearly considered return on investment to be their company's primary objective. Second was higher stock price, followed by market share and improving products and introducing new products. Improvement of social image and improvement of working conditions were dead last.
Japanese executives, meanwhile, ranked improving products and introducing new products as the most important corporate objective, followed by market share and then return on investment. Improvement of social image was considered more important than higher stock prices, although it was still not a high priority.
One additional impact of this notion of the corporation as a valued member of society is that Japanese companies have not traditionally been philanthropically inclined, believing that the wealth and job creation they provide is sufficient contribution to society. In terms of John Paluszek's "three circle" approach to social capitalism, they fulfill all the obligations of the first circle more fully than either U.S. or European companies, but have not advanced much in terms of the second and third circles.
Some Japanese business leaders have recognized this fact, and suggested that it must change as Japan strives to compete in more and more international markets. Most prominent among those calling for reform has been Akio Morita, chairman of Sony Corporation, who has spoken of the resentment many western business leaders feel towards Japan and warned that it may eventually hurt Japan's ability to compete.
"Japanese companies should be aware that European and American tolerance of Japanese business practices has reached its limit," he says. "Japanese companies put all their resources into the enhancement of their ability to survive competition. This inevitably meant that even when Japanese companies substantially increased their profits, they did not automatically share the increase with their shareholders, employees or communities."
Morita called for more holidays and fewer work hours for employees, higher salaries, increased dividends to shareholders, greater contributions to communities, and more consideration for issues of environmental protection. The process, which quickly gained devotees in Japan, was known as "kyosei," or "openness."
However, Siegel says a database search today reveals that while the number stories using the word "kyosei" rose steadily over the past five years, reached a peak six months ago and then all but vanished as the recession struck. Today, she says, Japanese industry is retrenching, and no one wants to listen to new ideas.
"It doesn't make much sense, because things have to change, but right now people are too worried about the recession and the credit crunch to take any kind of risk on anything new," she says. "It will resurface, but it will be a while before it does."
Like the Japanese economic model, Eurocapitalism has its origins in historical factors. The European form of capitalism has been shaped, says McKinsey's Herbert Henzler, by an extraordinary mix of social and ethnic groups, political factions, religious influences, historical divisions and economic classes. Europe lacks either the unified culture of Japan or the uniform ideology—individualism—of the United States and this, Henzler says, is an advantage.
Other historical factors are identified by Terence Fane-Saunders, president of London's Chelgate PR, an international public relations consultancy.
"You need to understand that the Christian Democrats, the right-wing conservative parties of Europe, have their roots in a Christian tradition, and that the churches are in some ways shadowing the socialist movement, offering the same values of equality and justice, but from a Christian perspective," he says.
"The commercial and economic structure is also quite different from the American model. With the exception of the U.K., the stock markets in Europe are not really a significant source of business capital. Europeans don't really invest in equities. Funds are raised through the banks and, in some cases, directly from government. In Germany, the federal government has shareholdings in hundreds of companies. In Spain the Instituto Nacional de Industria, the State holding company, is an active participant in the economy. In Italy they have three state owned companies."
Having said all that, almost all observers stress the importance of recognizing that there is no single European model. BursonMarsteller's Jim Lindheim points out that the British system, for example, is highly confrontational, and much closer than the U.S. than to Germany, which is cited as the country that epitomizes Henzler's notion of "Eurocapitalism."
"Most American managers have a hard time making sense of Germany," wrote Kirsten Weaver, assistant professor at Northeaster University's College of Business Administration, in the September-October 1992 edition of Harvard Business Review. "Labor costs are higher, paid vacations are at least three times as long, and strong unions are deeply involved at all levels of business, from the local plant to the corporate boardroom. Yet Germany is the greatest competitive threat to the United States after Japan."
The Germans, she says, talk not of a free market economy, but rather of a "social market" or soziale marktwirtschaft. The term reflects the German conviction that the economy and society are interdependent, not two separate realms, that business has a responsibility to provide stability in society, and nonbusiness institutions such as labor unions and government have a say in how business is managed. "In Germany, employers and unions are known as soziale partner, or `social partners'," she says. "As the name suggests, labor is considered a full participant in economic and political life. Union and worker rights are guaranteed by law. Most companies have to participate in collective bargaining nationally, regionally or both, depending on the industry."
Ralf Hering, president of Eurocom Corporate & PR, an international agency which is headquartered in Germany, says the German system has been shaped since the early-'50s to create widespread social responsibility and social consensus.
"In the mid-'50s, Germany was the first company in the western world where delegates of the work force became members of the board of directors of major companies, in the steel and coal mining industries," he says. "Today, in all major industries in Germany, trade unions are represented on the boards of corporations and have taken responsibility for the entrepreneurial decision-making process."
According to German law, workers at every company with five or more employees have the right to elect representatives to a works council. (In Italy, the same applies to companies of more than 15 employees.) These councils have broad access to information about the financial condition of the company and the local plant and must be consulted by management about organizational changes such from job classifications to flexibility in shift assignments.
McKinsey's Henzler says that laws on codetermination have made European CEOs more deeply committed to employees, treating them "more like partners in a long-term enterprise than anonymous factors of production" and recognizing that the work force cannot be considered disposable or interchangeable and must therefore be taken seriously, kept informed and included in the decision-making process.
One aspect of corporate policy where this respect for employees has an influence is executive compensation, Henzler argues. "Socially healthy top pay at European companies is generally set at no more than 12 to 15 times the average paycheck—a far cry from the 100 to one relationship that exists between the pay of ceos and shop-floor workers in many U.S. companies."
Furthermore, Hering points out, the public sector in Germany employs in excess of 10 million people—an unusually high figure per capita of the population—and has a system of publicly financed education, social welfare and health care that is far more liberal than that in the U.S. and most other western countries. One consequence, of course, is far higher levels of corporate and income taxes.
"But I always feel that Germany is a country worthwhile to pay taxes to, because you get a lot in return: free schools, free universities, a working health system, a social welfare system that is probably the best in the world," he says. "The human capital, the base for any business success in the `90s and beyond, is extremely well-educated, and the educational base is extremely broad.
"Europe has learned a lot from the U.S. in terms of democracy, freedom and political responsibility. The U.S. can learn a lot from Europe, and specifically from Germany, in terms of social consensus and social responsibility."
"We have long understood that homelessness, illiteracy and other social ills are not only morally unacceptable but also economically harmful," Henzler adds . "Unlike people in the United States, most Europeans can't think of themselves as riding in the same boat."
For this reason Germans also accept that government will play a greater direct role in the economy than it does in the U.S. and Japan, and that management activity will be more tightly restricted, he says. While the costs of the social overhead are considerable, most executives accept that they lay the groundwork for stable, long-term alliances among the many constituencies—workers and managers, suppliers and distributors, industry and government—that are crucial to the success of the economy.
"I think the biggest difference between the two societies is that one is regulated and the other is deregulated," says Uwe Kohrs, international president of Leipziger & Partners. It will come as a surprise to many American managers to learn that the "deregulated" system he refers to is the United States, but by comparison he is probably correct. "We are getting more and more regulated in the environmental affairs arena, for example."
The German social model, says Ralf Hering, has automatically led to greater environmental responsibility than U.S. companies are inclined to exhibit. Many companies adopted tough environmental standards long before government forced them to do so, and self-regulation has reached levels beyond anything in the U.S. or Europe. Indeed, Germany's efforts to impose the same kind of standards throughout the European Community has met with almost universal resistance.
"All this means that in some ways, public relations in Europe has to fulfill its role in a fuller sense than in the U.S.," says Terence Fane-Saunders. "It has to recognize that it is the business of relationship creation and management, rather than simply communication. So media relations and other standard external relations techniques have to be combined with more complex forms of relationship management and communication."
Many European businesses include what they call "social accounts" in their annual reports. Indeed, such accounts have been mandated by law in France since 1977, while in Germany they are voluntary, but provide detailed information on issues like employment, wages, fringe benefits, social security expenditures, working conditions, job training, environmental initiatives, and community-related activities.
Many large U.S. companies have had difficulty coming to terms with the German market's expectations, says Uwe Kohrs.
"There is a prejudice in Germany against American companies," he says. "Because American companies have shown in the past that they like to come to this market and try to introduce their own methods rather than analyzing the market and finding out how we do business. They try to run a business by hiring and firing people, by fighting the labor unions, by using very hard sell marketing methods.
"The Japanese approach has been quite different. The first thing they do is travel the country and analyze, try to figure out how people think and why they think that way. They are much more long-term oriented. They will make a commitment to a country and an investment in a country and they do not pull out if they have not made their money back in two or three years. They are not so arrogant as the Americans."
Some are skeptical of the German model's ability to survive. Peter Walker, managing director of European Communication Partners in the U.K., says the social contract in Germany is "about to be thrown into sharp focus as the decline in Germany continues, wage negotiations start national strikes and tax increases become necessary to pay for the black hole in the east. The comfortable but informal partnership between management and labor that grew out of growth will vanish."
And Kirsten Weaver admits that doubters see the German economy as inflexible and ill suited to global competition. They say the cozy relationships among business, labor and government mean German workers are overpaid and overprotected. Her response is that what look like "rigidities" at the level of these individual companies are actually powerful sources of flexibility for the economy as a whole.
"The system has adapted remarkably well to new competitive realities in the past," she says. "There is little evidence to suggest it won't continue to respond in the future."
Burson-Marsteller's Jim Lindheim agrees. He concedes that there has been some scattered disruption in Germany, but says the country's current economic problems are more likely to persuade business, labor and government to cleave more closely to the traditional way of doing things than to search for new solutions, and that the cooperative model is close to arriving at its customary compromise.
"The Germans are looking to the unions to accept zero growth in wages for the next couple of years while they recoup some of the costs of unification," he says. "Americans who do business in Germany are mystified. They ask why the unions would agree to such a thing. The answer is that the unions believe it is for the good of the whole economy."
In many ways, Lindheim says, the German attitude is a reversal of the oft-repeated notion that "What's good for General Motors is good for America." The German translation would likely be that "What's good for Germany is good for Mercedes-Benz" and BMW and Siemens and Lufthansa and Henkel.
"I don't believe this is a reputational issue. I think American companies probably spend a lot more time worrying about their reputation than German companies do. But I think German companies are more conscious of their role in society, and that leads them quite naturally to a set of behaviors. They don't do it because they care about their reputation, necessarily they do it because it's what they are supposed to do to create a healthy society."
Whether any of the three models—U.S., Japanese or German—is truly superior to the others is open to question. Each involves some trade offs, either by the corporation, or by consumers, employees or shareholders. And in the end, it may be irrelevant, since each model is uniquely a product of its own culture, and experience suggests it will be difficult to transfer either corporate or national cultures across national borders.
There can be little doubt, however, that as Herbert Henzler suggests each economic system,—and the companies that act within it—will increasingly be judged on the basis of how it provides for the many needs of the society it serves. Communicating on that issue will be a full-time role for public relations professionals in all markets.