lien tran thi hong and holloway - 2014 - developments in corporate governance - the case of vietnam

Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued - 2



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CORPORATE
OWNERSHIP & CONTROL



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Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

218
CORPORATE OWNERSHIP & CONTROL
Volume 11, Issue 3, 2014, Continued - 2

CONTENTS







DEVELOPMENTS IN CORPORATE GOVERNANCE: THE CASE OF VIETNAM 219

Tran Thi Hong Lien, David A. Holloway

IDIOSYNCRASIES OF TAKING RISK: A CASE OF A SOUTH-ASIAN CONTEXT 231

Helan Ramya Gamage, Ananda Wickramasinghe

DIVIDEND TAX, DIVIDEND PAYMENTS AND SHARE VALUES: A SOUTH AFRICAN
PERSPECTIVE 242

Me Stéfani Coetzee, Johannes de Wet

BEING ON TOP OF YOUR GAME AT THE BOTTOM OF THE PYRAMID 253

Pravina D. Oodith, Sanjana Brijball Parumasur

PAY PERFORMANCE SENSITIVITY AND EARNINGS RESTATEMENTS 273

Surjit Tinaikar, Kun Yu

CORPORATE GOVERNANCE AND INVESTMENTS 294

Wei Wang

Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

219
DEVELOPMENTS IN CORPORATE GOVERNANCE: THE CASE
OF VIETNAM

Tran Thi Hong Lien*, David A. Holloway**

Abstract

Corporate governance practices have changed significantly across the world in the past three decades.
Spectacular corporate failures during this period have acted as a catalyst for the development of codes
and guidelines that have resulted in the global acceptance of a ‘best practice’ model. This study
assesses the relevance of such a ‘one size fits all model’ for the developing nation state of Vietnam. The
findings of this analytical paper is that there are three key elements (government, international
institutions and the nature of business) that are pertinent and central to corporate governance
developments in the country. We also find that the quality of corporate governance in Vietnam is at a
medium level when compared to international practices. Vietnam still has a long way to go to construct
and embed effective corporate governance policies and practices and promote ethical business
behaviours and sound decision making at board level.

Keywords: Corporate Governance, Public Companies, Government, International Institutions,
Vietnam


* School of Management and Governance, Murdoch University, 90 South Street, Murdoch WA 6150, Western Australia
Email:

** School of Management and Governance, Murdoch University, 90 South Street, Murdoch WA 6150, Western Australia
Email:





1. Introduction

Corporate governance has come a long way in both
developed and developing nations in the past three
decades (Solomon, 2007; Tricker, 2012). A series of
spectacular corporate failures across the globe in that
period of time has acted as a catalyst for the
establishment of a range of enquiries across different
nations that have crafted recommendations to develop
sets of principles, guidelines and codes to help
construct a ‘best practice model’ of corporate
governance (Clarke, 2007; Dallas, 2004a; Hamilton &
Mickletwait, 2006; OECD, 2004; Psaros, 2009;
Solomon, 2007; Tricker, 2012). The major part of
this work on a best practice model has occurred in the
Western developed nations. The question that
remains unanswered is whether such a model is
capable of being imported without major change into
other regions of the world and used by developing
nations in their own evolving corporate governance
frameworks.
This paper investigates the situation in Vietnam
and argues that a ‘one size fits all’ model is not

necessarily the best approach for this developing
nation. We argue that there are key features and
cultural contexts in the country that need to be taken
into account when promoting appropriate corporate
governance policies and practices in the corporate
sector. In the end, we also acknowledge that
performance and behaviour in the corporate
governance field cannot be legislated for and needs to
be nurtured and encouraged across the country.
Vietnam provides effective case studies to assess to
what extent Western developed corporate governance
codes and practices are relevant to this vibrant,
regional nation state.
This paper consists of several parts. The first,
deals with the background literature of corporate
governance internationally and then corporate
governance developments in Vietnam. The next
section highlights and analyses the history of
corporate governance and the emergence of joint
stock companies in the country. The following part
focuses on three key elements (government,
international institutions and the nature of business)
that have emerged as central to the Vietnamese
corporate governance context. Then a discussion
section deepens the analysis and features a case of
serious fraud that raises serious questions about the
embedding of effective and ethical behaviours in the
corporate governance arena. The final part concludes
that Vietnam still has a longer journey to undertake
effective corporate governance reform and to embed

acceptable ethical behaviours in public companies.




Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

220
2. Literature Review

2.1 Corporate Governance

Corporate governance literature has identified a range
of different issues and perspectives. There are several
theories about the corporate governance phenomenon
including agency, transaction costs economics,
stewardship, resource dependency, stakeholder,
managerial hegemony and class hegemony. They
encompass different dimensions such as the role of
corporate governance in organisations and the role
and purpose of boards, theoretical origin, unit of
analysis, focal dimension, details about board activity,
level of empirical support and they also identify a
range of limitations about the appropriate application
of theory (Clarke, 2007).
There is an acceptance that agency theory is the
most prevalent theoretical lens used in corporate
governance research (Bebchuk, Cohen, & Ferrell,
2009; Claessens & Fan, 2003; Clarke, 2007; Mallin,
2013; Monks & Minow, 2004; Psaros, 2009;

Solomon, 2007; Tricker, 2012). Utilising this
theoretical insight, corporate governance issues and
concerns emerge because of the inappropriate
relationship that exists between the principal and the
agent. The principals are considered to be the
shareholders (owners) and board of directors; whilst
the agents are members of senior management. The
theory argues that the agents have their own personal
goals that are not the same as, or aligned with, those
of the principals, so they do not always act to advance
the interests of the principals. In other words, the
agents act primarily to advance their own self-
interests.
When this relationship imbalance occurs,
shareholders, corporation and economies can suffer
financially from illegal and/or unethical events such
as fraudulent accounting, insider trading,
unauthorized transactions and ultimately corporate
failures, as demonstrated by the Barings and Enron
scandals (Gourevitch & Shinn, 2005; Hogan, 1997;
Tricker, 2012). Avoidance of these negative
consequences requires that the principals/shareholders
need to exercise control over senior management
through a range of mechanisms; one of which is
effective corporate governance.
Corporate governance issues emerge because of
the separation between ownership and management
(Gourevitch & Shinn, 2005; Solomon, 2007; Swan,
2000; Tricker, 2012). This separation can be traced
back to the formation of joint stock companies in the

17
th
century. Increasing concentration of economic
power into ever larger corporations was accompanied
by a dispersion of ownership; individual shareholders
gave the power to blockholders and senior managers
who took daily charge of corporate operations (Berle
& Means, 1933). Berle and Means (1933) also
predicted that corporations would become dominant
institutions like nation states and religions.
Controllers (managers) of corporations must balance
the interests of the community, not just those of the
owners or the controllers. In other words, corporations
need to take into account owners, management,
employees and a range of other stakeholder groups.
This concept and argument led to the emergence
of the “Multi-stakeholders” theory of corporate
governance. “Corporate governance is defined as the
system of checks and balances, both internal and
external to companies, which ensures that companies
discharge their accountability to all their stakeholders
and act in a socially responsible way in all areas of
their business activities” (Solomon, 2007, p. 14). The
Organization for Economic Co-operation and
Development (OECD) and the World Bank, two
active promoters of good corporate governance
practices on a global scale, have identified a list of
these stakeholder groups that include management,
the board of directors, controlling shareholders,
minority shareholders and other stakeholders such as

creditors, financial institutions, employees, trade
unions, public interest groups and general society.
Corporate governance processes and activities need to
take into account the relationships between these
diverse parties as they are affected by the very same
structures and processes that impact the direction and
control of companies (The World Bank, 2006).
Whilst agency theory has equivocal empirical
evidence and has been heavily critiqued, multi-
stakeholder theory has received solid support in the
literature (Zahra & Pearce quoted by Clark, 2007, p.
28).
Taking a further step, some researchers advocate
using a mix of theories for empirical investigation. “A
multitheoric approach to corporate governance is
essential for recognising the many mechanisms and
structures that might reasonably enhance
organizational functioning” (Daily, Dalton &
Cannella quoted by Clark, 2007, p. 26).
Serious corporate governance concerns and
scandals have emerged during the past three decades.
Corporate governance issues came to the fore after a
series of spectacular corporate failures and scandals in
leading corporations such as Barings (UK), Allied
Irish Bank (Irland), Enron (US), WorldCom (US),
Tyco (US), Marconi (UK), Swissair (Switzerland),
Royal Ahold (Netherlands), and Parmalat (Italy).
Several elements had been attributed as the root
causes for the scandals such as corporate
overexpansion; over dominant CEOs; greed, hubris

and desire for power; failure of internal controls, and
ineffective boards (Hamilton & Mickletwait, 2006).
Fraudulent accounting techniques were often used to
conceal serious financial and governance problems.
Poor external auditing practices also allowed
problems to remain hidden and prominent rating
agencies also failed to provide early warning of
troubles ahead (Hamilton & Mickletwait, 2006). As a
result there emerged a demand for serious reform of
corporate governance principles and practices. A
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

221
series of enquiries and government initiatives
identified that the solution should be at the macro
level by constructing best practice codes of corporate
governance.
In as much as companies are “social
institutions”, their impacts on societies and economies
are so significant that corporate governance problems
attract the attention and intervention of governments
in resolving these concerns. There has been a
proliferation of corporate governance codes and
policy documents, voluntary or mandatory, both at the
national and supra-national levels (Solomon, 2007).
At least 96 nations have developed what they deemed
to be appropriate corporate governance codes (ecgi,
2013).
The United Kingdom is generally acknowledged
as a world leader in corporate governance reform, as a

result of a growing stakeholder interest in corporate
governance issues within the boardroom, the
institutional investment community and the
Government (Solomon, 2007, p. 49). The most
prominent countries in the reform movement, besides
the United Kingdom, are the United States, Japan,
Switzerland, South Africa and Korea, and most of the
extant literature has focused on these developments.
However, other countries such as Russia, China, India
and Brazil have also emerged as new locations for
corporate governance research and reform (Claessens
& Fan, 2003; Monks & Minow, 2004; OECD, 2001,
2011; Shleifer & Vishny, 1997; Solomon, 2007;
Tricker, 2012)
Different reform approaches emphasize different
aspects of corporate governance codes and practices.
The focus is on ensuring a sound basis for an effective
corporate governance framework, enhancing the
rights of shareholders and key ownership functions,
the equitable treatment of shareholders, the role of
stakeholders, disclosure and transparency, as well as
the responsibilities of the board (OECD, 2004).
Tricker (2012) identified six areas for improvement,
including clarification of the board role, the board’s
access to information and understanding of the
organisation, enhancing good relations between
boards and management, effective board oversight of
company strategy, appropriate management
development, and succession and risk management. A
narrower focus considers only shareholders and

ownership, directors and monitoring, management
and performance (Monks & Minow, 2004). Padgett
(2012), however, argues that corporate governance
reform should focus on issues to do with ownership,
the board of directors, stakeholders, remuneration, the
market for corporate control, regulation, and
communication and disclosure. Mallin (2013) also
includes institutional investors in shareholder and
stakeholder perspectives.
Corporate governance does matter and there is
no “one size fits all” concept. A holistic approach that
incorporates multiple explanatory factors and
stakeholder groups would be a reform process that
can deliver an effective solution in the longer term
(Dallas & Patel, 2004), p. 13).

2.2 Corporate governance – Country
Assessement

Corporate governance alternative systems are
classified as Anglo-Saxon, Germanic, Latin and
Japanese with acknowledged differences in their
orientation, representative countries, prevailing
concept of the firm, the board system, main
stakeholders that exert influence on managerial
decision-making, importance of stock and bond
markets, market for corporate control, ownership
concentration, compensation based on performance
and the time horizon of economic relationships
(Clarke, 2007). Researchers generally agree that the

main categories of corporate governance in the world
consist of models from the Anglo-America,
Continental Europe, Asia Pacific, emerging markets
and transition economies (Clarke, 2007; Dallas,
2004a; Lou, 2007; Psaros, 2009; Solomon, 2007;
Tricker, 2012).
Different countries start their corporate
governance reforms in different ways. Many
governance reformers have cited the Cadbury Report
1992 in the United Kingdom as a key development in
the modern literature on corporate governance. This
code, and the development of the U.K. Combined
Code which was to follow, was formulated as a
response to several visible U.K. corporate failures of
the late 1980s and early 1990s (Dallas & Patel, 2004).
Similarly, regulatory reforms in the United States
following the corporate failures in that country were
an effort to stabilise the financial markets.
In Europe, several countries’ corporate
governance codes and other efforts were inspired by
the code in the UK and US (Clarke, 2007). “At the
beginning probably there was a sense of simply
matching the regulation of close economic neighbours
by developing similar codes, however over time it is
likely that the engagement in the codes became more
real” (Clarke, 2007, p. 175-176).
In Asian countries:
“a range of external agencies have an interest in
sustaining the reform process including the IMF,
World Bank, and Asian Development Bank, and they

have all engaged in major initiatives to facilitate and
support the reform process. Moreover, international
investors will not be sumpathetic to economies that
are not consistently raising their standards of
corporate governance” (Clarke, 2007, p. 207-208).
In addition as Dallas argued:
“Country factors can play important, even
determining, roles in setting the environment for
corporate governance practice at the individual
company level. Attitudes toward corporate
governance can vary from country to country. Diverse
country forces – legal, political, historical, cultural –
come together to shape ownership structures,
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

222
stakeholder priorities, and fundamental attitudes
toward the role of the firm in the economy” (2004a, p.
138).
Currently there are two major frameworks in
use: one incorporates rules based approach and the
second uses a principles-based approach. In addition,
the main areas of focus are market infrastructure,
legal infrastructure, regulatory infrastructure and
information infrastructure (Dallas, 2004b). Also, there
are the two analytical processes of modeling and
clinical/interactive approaches (Dallas, 2004b).
Finally, there are varying country perspectives
and drivers in relation to corporate governance
initiatives such as Standard and Poor’s Sovereign

Credit Ratings, World Bank’s Rule of Law
Regulatory Indicators and Transparency
International’s Corruption Perceptions Index (Dallas,
2004a). The Organisation for Economic Co-Operation
and Development (OECD) is a major player in the
area of country assessment with a system of national
reports, regional roundables (Asia, Eurosia, Latin
America, Middle East and North Africa and South
Africa). The assessment is also based on the main
aspects of legal and regulatory system and economic
conditions.

2.3 Corporate Governance in Vietnam

Vietnam is still an under-researched location in the
literature on corporate governance. For example, the
book, Corporate Governance and Accountability
(Solomon, 2007), provides an analysis and overview
of corporate governance developments in 36 countries
around the world, including not only developed
countries but also developing or transition countries
such as Poland, Thailand, Indonesia and Hungary.
Vietnam is, however, not included.
A similar omission occurs in some of the more
highly cited papers on corporate governance, such as
Shleifer and Vishny (1997) and Porta et al. (1998).
For instance, in "A Survey of Corporate Governance",
the authors investigated corporate governance through
a major review of published studies mainly from the
United States, United Kingdom, Japan, Sweden and

Russia; they felt it “unfortunate” that there is little
research from the rest of the world (Shleifer &
Vishny, 1997); and, of course, there were no studies
about Vietnamese corporate governance. In “Law and
Finance”, the authors used a sample including non-
financial listed companies from 49 countries in
Europe, North and South America, Africa, Asia and
Australia; there were no socialist or transition
economies (Porta, Lopez‐de‐Silanes, Shleifer, &
Vishny, 1998); obviously, again, Vietnam was not
included.
In some studies focusing on the Asia-Pacific
region, such as "Corporate Governance in Asia: A
Survey" (Claessens & Fan, 2003) and “Corporate
Governance in Asia: A Comparative Perspective
(OECD, 2001), the authors discussed and analyzed
Vietnam’s neighboring countries such as China,
Japan, Thailand, Malaysia, Singapore, Korea and
Indonesia but not Vietnam itself. In addition, since
2006, the OECD has published a series of reports on
corporate governance in the region (OECD, 2011), in
which Vietnam is more frequently mentioned as a
participant in the surveys. The reports show progress
in the region based on six main corporate governance
principles recommended by the OECD; however,
there are no major studies of corporate governance in
Vietnam.
What has led to this outcome and gap in the
literature? Most of the leading international studies
are based on previous studies published in leading

journals, conferences, books and reports; these
publications have not been extended into the
Vietnamese context. Therefore, a thorough
investigation into the corporate governance policies
and practices of listed companies in the country
should be of interest to different stakeholders, such as
international academics, policy makers, and investors
and an effective contribution to closing this gap.
In 2006, the World Bank issued a Report on the
Observance of Standards and Codes (ROSC) –
Corporate Governance Country Assessment on
Vietnam. The corprorate governance frameworks
were benchmarked against the OECD Principles of
Corporate Governance: the main areas for focus
included ensuring the basis for an effective corporate
governance framework, the rights of shareholders and
key ownership functions, the equitable treatment of
shareholders, the role of stakeholders in corporate
governance, disclosure and transparency and the
responsibilities of the board. The report analysed four
keys issues relating to investor protection, disclosure,
enforcement and company oversight and the boad.
The report also made several policy recommendations
(The World Bank, 2006).

3. Analytical Overview of the Development
of Corporate Governance in Vietnam

On a narrow scope, corporate governance issues relate
mainly to public companies. The definition of a public

company is enshrined in Article 25, section 1, Law on
Securities (Quốc hội khóa 11, 2006) :
A public company means a shareholding
company which belongs to one of the following three
categories:
(a) A company which has made a public offer
of shares;
(b) A company which has shares listed on the
Stock Exchange or a Securities Trading Centre;
(c) A company which has shares owned by at
least one hundred (100) investors excluding
professional securities investors, and which has paid-
up charter capital of ten (10) billion Vietnamese dong
1

or more.



1
Currency unit in Vietnam
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

223
3.1 Securities Markets Development

One critical feature of joint stock companies is that
their shares can be transferred freely between
different parties. This enables the number of
shareholders to range from three to an unlimited

number. When the number surpasses the threshold of
100, a company is a designated as a public company.
Traditionally, Vietnamese do business and trade
with people they know personally; personal
relationships are considered a requirement for
ensuring credibility and trust among parties. When
capital source funding from this group is not
sufficient for a particular business, company owners
and managers then look for investment funds from
outsiders. These outsiders are also looking for
credible partners in which to invest. The two parties
then agree on a mechanism for ensuring credibility
other than the usual personal relationship. Securities
markets with prescribed financial functions of listing,
public offering, and share auction are such a
mechanism since this mechanism is backed by the
Government. In fact, both of the securities exchanges
in Vietnam are one-member limited liabilities
companies with 100% State ownership with the
government represented by the Ministry of Finance
(Hochiminh Stock Exchange, 2013).
The first securities exchange of Vietnam was
opened in Ho Chi Minh City in 2000; the second one
was in Hanoi and came into operation in 2005. A
central over-the-counter exchange system (UPCoM)
was also opened in 2009 under the management of
Hanoi Stock Exchange. The Law on Securities was
passed and promulgated by government in June 2006
and subsequently amended in November 2010. This
provided the legal and enhanced framework for

securities markets in general and markets for public
companies in particular.
At the start, there were only two companies
listed on the Hochiminh Stock Exchange. By April
2013, there were 702 listed companies on both
exchanges, accounting for 55% of all the public
companies in Vietnam. This is evidence of the
exchanges’ influence on the development and growth
of public companies across the country.

3.2 Equitization of State-owned
Enterprises (SOEs) and the Formation of
Public Companies in Vietnam

The transformation of state-owned enterprises into
joint stock companies in Vietnam was conducted via
several careful steps including “test” (1990), “trial”
(1992) then equitization (in other words,
privatization) on a large scope (1996-1998) (Chính
phủ, 1996; Chủ tịch Hội đồng bộ trưởng, 1992; Hội
đồng bộ trưởng, 1990).
From 1998 to 2007, equitization was conducted
on large scale (Chính phủ, 1998, 2002, 2004).
Conditions were lowered to allow legal entities and
natural persons to have rights to buy shares. All small
and medium enterprises in industries that the
Government did not need to keep under 100%
government ownership were part of the equitization
scheme. However, the biggest corporations were not
on the list. In 2007, big corporations with 100% state

ownership were then put on the equitization scheme
considerations (Chính phủ, 2007, 2011). Some of the
big ones that were sucessfully equitized and listed are
Vietcombank, Military Bank and Vietinbank. There
are many other large entities that are expected to be
part of large IPO offerings in the future, such as
Vinaphone, Mobiphone, Vietnam Airlines, BIDV and
Agribank.
In 2012, the Prime Minister approved a scheme
for re-structuring state-owned enterprises and
corporations in the period up to 2015 with an
important focus on classifying them into sub-
categories in which the Government maintains either
100%, 75%, 65% and 50% ownership (Thủ tướng
Chính phủ, 2012). The equitizations program should
have been finished in 2010. However, the equitization
process has slowed down because of the large scale
and complexity of the remaining corporations. The
scale of the new scheme is such that one cannot
expect the equitization/privatisation process to be
completed before 2020.
The equitization schemes have transformed a
significant number of SOEs into joint stock
companies including public companies. Thirty
companies form the VN30 indice baskets of the Hanoi
Stock Exchange and the Hochiminh Stock Exchange
as at April 2013, with each basket containing 16
companies that used to be state-owned enterprises that
were privatised. VN30 indices are calculated based on
the 30 top shares in terms of market values which

accounts for about 80% of total market value and 60%
of total trading value (Sở giao dịch chứng khoán
thành phố Hồ Chí Minh, 2013).
In addition, most of the listed companies outside
the VN30 baskets were also formed as part of the
equitization process. This development provides
evidence of the crucial nature of the contribution of
equitization schemes in helping to establish a robust
group of public companies in Vietnam.

3.3 Typical Features of Corporate
Governance of Public Companies in
Vietnam

As part of this development phase, the evolution of
corporate governance in the public sphere in Vietnam
highlights three key features that are analysed in the
following sub-sections.

Leading Role of the Government

The government of the day is the prime initiator when
it comes to making laws that embedded key corporate
governance principles and practices. Governments
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

224
around the world carry out this key role through the
enactment of laws and through court processes that
ensure a central role in creating principles and codes

for corporate governance in all nations (Gourevitch &
Shinn, 2005). If the private “bonding mechanism” is
effective, then the role of politics and laws are less
important; if, however, this mechanism is not
effective then solutions to such a problem require the
enactment of effective laws (Gourevitch & Shinn,
2005).
In the 20-year development of public companies
in Vietnam, the government opened the way for the
creation of joint stock companies, and also supplied
the markets with the very first public and listed
companies and created the biggest public companies
through the privatisation of SOEs. The government
has also created the framework, and principles for
corporate governance and guided the markets to
conform with these codes.
The establishment of a corporate governance
framework has achieved significant progress in a
medium time frame. In 2006, the “legal framework
and institutional foundation for capital market in
Vietnam is in its initial development” (World Bank,
2006, p. 1). The legal framework for corporate
governance is regulated by the Law on Enterprises
enacted in 2005, the Model Charter 2002 and the Law
on Securities 2006. Vietnam has had to confront
major challenges in enforcing laws, enhancing
institutions for administration, compulsory law
enforcement, and market development as well as
promoting good corporate governance.
In 2012, six years after the previous comment,

institutional framework for effective corporate
governance has been issued. In fact, administrative
agencies have implemented active measures for the
last years in issuing appropriate documents on
enhancing corporate governance. In 2010, Laws on
Credit Institutions was approved. After Circula
09/2010
2
, a new circular on information declaration
was approved in April 2012 (Circular 52/2012 by
Ministry of Finance), and Guidlines on corporate
governance was issued in July 2012. All of these legal
documents expose new challenges to companies in
Vietnam with poor corporate governance quality
(IFC, 2012, p. 23). (Tổ chức Tài chính Quốc tế (IFC),
2012), 23).
Recognizing the importance of the government
in corporate governance in Vietnam, the International
Finance Corporation (IFC) warned that “The
government must be “a pioneer” in promoting good
corporate governance practice. At least, the
government needs to approve its representatives in
companies with major part of state ownership,
requires those companies to implement good
corporate governance” (IFC, 2012, p. 24). In
addition, “shareholders, especially state shareholders,
need to more actively participate in corporate


2

Circular regulates information disclosure on sercurities
markets by the Ministry of Finance
governance issues” (IFC, 2012, p. 25). Three years of
Corporate Governance Scorecard reports reveal that
corporate governance in Vietnam has been
implemented in a top-down way, relying on legal
framework and penalty measures (IFC, 2012, p. 23).
The government can influence corporate
governance practices in public companies in two
major ways, either by establishing an appropriate
institutional framework for these public companies or
by directly participating in corporate governance as a
key shareholder within these companies. A recent
survey concluded that state ownership had a
negligible impact on corporate governance scores and
practices by comparison with foreign shareholders.
This finding also identified that the government held a
controlling ownership interest (50% or over) in 31%
of all the companies surveyed (IFC, 2012, p. 20).
The government plays a crucial role in the macro
political environment; changes in the political
environment and interactions among key stakeholders
occur continuously and they can affect corporate
governance. For example, the extension of pension
funds (especially of Pillar 2 – Corporate funds, and
Pillar 3 – Savings and investment of employees) acts
as a direct driver for enhancing employee
participation in corporate governance (Gourevitch &
Shinn, 2005, p. 23). These major stakeholders and
shareholders include: financial institutions, banks,

other firms; family or ethnic networks; and state
ownership (Gourevitch & Shinn, 2005, p. 5).
In the context of Vietnam, the government’s key
role as a major shareholder in a range of public
companies and its attention to employees’ benefits
which is expressed through the participation of the
trade union in corporate activities (a key feature of a
socialist society) work relatively harmoniously. In
addition, corporate managers are selected through the
influence of key stakeholders especially the
government. Therefore, in many public companies, a
coalition exists that is similar to a corporatist
compromise coalition
3
. A similar situation occurs in
those public companies without significant levels of
state ownership. As a result, majority shareholders
prevail and minority shareholder protection is weak.
The average score of “Equitable treatment of
shareholders” has continuously decreased in the IFC’s
Corporate Governance Scorecards in consecutive
years from 2009 (65.1), 2010 (61.0) through to 2011
(57.8) (IFC, 2012, p. 13).
In addition, pension savings of employees are
almost all via social insurance funds that are mostly
contributed to by the companies, a minor part by the
employees and then the funds are managed by the
Government. This is considered Pillar 1 amongst the
three pillars of the pension system. Corporate pension

3
In a corporatist compromise coalition, managers and
workers form a coalition that win over the diffused owners. As
a result, the owners form a blockholding to balance the
relationship and protect their interest in companies
(Gourevitch and Shinn, 2005)
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

225
funds do not exist and private investment by
employees is low because of low wage rates.
Employees do not usually have direct input into the
investment activities of the current government-
managing pension funds, so they do not have
incentives to participate in the corporate governance
of public companies.
Clearly, the impact and the influence of the
political system over corporate governance of public
companies in Vietnam are highly visible and
pervasive. To sum up, the participation of the
government in corporate governance policies and
practices is substantial; however, the outcome is only
positive in the area of the governance framework.
While playing the role of a major shareholder, the
government has not generated more positive
outcomes in the Corporate Governance Scorecard
results compared to the private sector, and especially
in respect to those companies with foreign ownership
levels.

Active Participation of International Institutions

Corporate governance frameworks have evolved and
developed around the world via a process of
dissemination from one country to another. Until the
first half of the 2000s the “main propellants of
thoughts and practices in corporate governance come
from the United States. Institutional investors from
U.S. influenced corporate governance practices in
other countries where they invested in and required
U.S. governance principles. The number of research
and publications on corporate governance from
United States were bigger than that from the rest of
the world” (Tricker, 2012, p. 474). Together with the
development and the emergence of other economies
such as the BRIC (Brazil, Russia, India and China)
and the Middle East countries, and diminishing
importance and attractiveness of capital flows from
United States, initiatives in corporate governance
frameworks have emerged in other countries. This
started with the influential Cadbury report in 1992
investigating financial aspects of corporate
governance in United Kingdom, followed by OECD
and World Bank’s principles (not through legislation)
of corporate governance, and best practice models for
corporate governance in family businesses in Asia
(Tricker, 2012).
International financial institutions (International
Monetary Fund (IMF), Bank for International

Settlement (BIS) and OECD) have a special interest
in promoting good corporate governance; they act as
intermediaries connecting good corporate governance
with major shareholders and external investors,
especially international investors. Development
organizations such as the World Bank and the OECD
are interested in enhancing the protection of minority
shareholders in order to develop stronger and more
effective capital markets; with the resulting market
development, in its turn, promoting national and
regional economic growth. The IMF and BIS have a
vital interest in the reduction of ethical problems in
financial corporations (Gourevitch & Shinn, 2005). In
other words, these institutions are pioneers in the
opening of national markets, establishing a level
playing field favourable for national and international
investors. This disseminating mechanism has been
well demonstrated in outcomes that had been
embedded in Vietnam. The World Bank and IFC are
the two institutions with the most credible activities in
promoting the establishment of effective corporate
governance practices in public companies in Vietnam.
From 1999 to 2013, the World Bank had
financed Vietnam through the establishment of 26
technical support projects that included components
focusing on corporate governance with a total total
value of US$1,652,780,000. These projects focused
on major issues such as renovating the management
of state-owned enterprises, restructuring the banking
system, educating directors of boards about good

corporate governance as well as projects aimed at
alleviating poverty (World Bank, 2013).(Ngân hàng
thế giới, 2013)
In 2006, the World Bank published a report on
corporate governance in Vietnam, Report on the
Observance of Standards and Codes (ROSC) –
Corporate Governance Country Assessment –
Vietnam 2006. This is considered to be the first
document that has introduced the definition of modern
corporate governance into Vietnam, and evaluated the
observance of corporate governance codes and
standards based on OECD principles. This report
analyses the corporate governance framework in
Vietnam, including components of relevant laws and
regulations, supervisory and compulsory behaviour
mechanisms and markets, especially the securities
markets. The report highlighted major issues,
summarized the context of observance and
compliance with OECD corporate governance
principles and recommended additional points for
further improvement (World Bank, 2006). Since this
report, the term “corporate governance” has been
disseminated widely from policy consultants to
researchers and business people throughout Vietnam.
(Ngân hàng thế giới, 2006)
Following the initiatives of the World Bank, the
IFC – a member of the World Bank Group, is
implementing the “Vietnam Corporate Governance
Project”. According to the IFC, this project aims to
improve overall corporate governance practices in

Vietnam via a specific range of activities such as:
consulting corporations, institutional investors and
banks about the implementation of good corporate
governance practices; working with related state
agencies in improving the legal framework for
corporate governance; enhancing capability for
corporate governance training and education
organizations; and, improving society’s understanding
of the importance of corporate governance. The
project has published a series of reports and books on
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

226
corporate governance such as the corporate
governance scorecard (2010-2012), OECD corporate
governance principles (2004), and a manual for board
directors (2010). These empirical research outcomes
and essential corporate governance knowledge needs
to be widely disseminated to all interested parties.

Passiveness of Businesses

How have businesses responsed to these ranges of
activities and promotion of good corporate
governance by the government and the international
institutions? The analysis in the first section of the
three key features has demonstrated the degree of
activity by the government in establishing and
continuously improving the institutional system for
corporate governance. However, from the perspective

of business, there has been little progressive change,
except for some minor cases (IFC, 2012). In 2012, the
100 biggest listed companies on the two exchanges of
Vietnam showed a decrease in corporate governance
score results referred to earlier in this paper; only one
conclusion can be be drawn from this. The companies
themselves have not fulfilled their duties in
developing a quality investment market in Vietnam
(IFC, 2012).
Jay Lorsch (cited by Tricker, 2012, p. 21-22)
discovered that the most current corporate collapses
were due mostly to the increasing complexity of the
companies and this situation could only be solved by
improvement in the role and functions of the boards
of directors, not by direct intervention by government.
Boards should develop appropriate structures,
processes and practices. Muth and Donalson (cited by
Tricker, 2012, p. 62) recognized that a board with
executive members operated better than a board that
merely ‘ticked the boxes’ with respect to best practice
corporate governance principles in using independent
board members. This discovery goes against accepted
ideas of good corporate governance; however, there is
support for Lorsch’s argument that it is the effective
performance of the board of directors itself, not the
government that can improve and deliver effective
corporate governance.
All companies need a charter that forms the
foundation for companies corporate governance
regime; however, many board members and

committee members have never even read the charter
(Tricker, 2012). This situation also occurs in Vietnam;
where almost all listed and unlisted companies have
implemented the model charter for joint stock
companies issued by the Ministry of Finance (Hải &
Liên, 2012), with only minor modification for
individual company details and industry. This appears
to mean that shareholders also do not consider the
charter important for protecting their benefits.
There may be two reasons behind this outcome.
The first is that the shareholders may want to rely on
external mechanisms such as the government to
protect their benefits; the second is that they may
choose to exit by selling off their shareholding instead
of voicing their concerns when they recognize the
companies are not performing effectively. In both
cases, the shareholders do not invest resources in the
development of private contracts such as the charter.
In reality, the second choice is popular in Vietnam
because of a traditional viewpoint that until you get
compensation, you have suffered more than that
4
.
The government should pay special attention to this if
they want to enhance good corporate governance;
people need a solution to the problem that
shareholders do not trust official bonding
mechanisms, both private and governmental.

4. Discussion

Despite the efforts detailed above, the corporate
governance performance of companies in Vietnam in
general, and public companies in particular, are at the
medium quality level on several scales. In a two-
phase survey, Hai & Lien (2012) found that the
quality of corporate governance of companies listed
on the Hanoi Stock Exchange in 2010 was at the
medium level (25.73/51) on the Gov-Score scale,
meeting the minimum requirements of promulgated
regulations and that there were only minor instances
of progressive practices and improvement. This
conclusion matches the results of the IFC’s
“Corporate Governance Scorecared Report 2011”
which was based on 2010 data.
The report had calculated that the average
corporate governance score of all surveyed companies
was 44.7%, slightly higher than the score of 43.9% in
2009 (IFC, 2011). In general, the companies had
made some improvement, such that there was no
companies with a low score below 20%, the minimum
score in 2010 was 29.3% (IFC, 2011). However, this
level of improvement was not maintained through to
2011. According to the currently accepted standards
on good corporate governance practices, the score
should be in a range from 65% to 74%; however none
of the companies surveyed in Vietnam recorded such
a score (IFC, 2012). In 2010, 80% of the companies
scored from 40% to 59%; whilst in 2011, this
percentage had reduced to 73% and there were more

companies registered as scoring from 10% to 29%
compared to the 2010 results (IFC, 2012). Even
among the top 25 companies by market value, the
average corporate governance score was only 46.5%,
which was only slightly higher than the overall
average of 42.5% (IFC, 2012). These results
substantiate Hai & Lien’s conclusion that there was
no difference in the corporate governance of
companies listed in Hanoi Stock Exchange in 2010,
with scores ranging from 24 to 28 (on a 51 point
scale). Analysis of a 2011 survey of 107 public
companies (either listed or unlisted) based on the
Gov-Score criteria shows that the quality of corporate


4
An old saying in Vietnam
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

227
governance in public companies in Vietnam has only
shown a minor improvement and there is no
significant differences among corporate groups even
though they differ in scale and their listing on separate
exchanges. The 2011 Gov-Score was 24.6/51, slightly
lower than the score 25.7 in 2010 (Hải & Liên, 2013).
The Anglo-Saxon corporate governance model
and system has been developed specifically for a
market based system with diffused equity ownership,
strong minority protection and disclosure, and strong

company law enforcement. European continental
countries have corporate relationships based around
bank finance and with business networks at the center.
Asian countries, on the other hand, utilised a
corporate governance approach that is personal
relationship based, with high levels of family control
and a business networks perspective (Clarke, 2007).
Vietnam is closer to the Asia model with some minor
differences.
In Asian countries, researchers call for stronger
government intervention because they have seen the
failure of voluntary efforts and lack of effective action
by business itself. They also call for a stronger
supervisoring role by banks. However, in Vietnam,
the reliance on banks for such purposes can also be
suspect. The following section identifies a serious
problem in one of Vietnam’s main banks and is an
exemplar of the difficulties in Vietnam for embedding
effective and good corporate governance practices in
large companies.


Fraud and the Forging of Documents at
Vietinbank

Vietinbank was the only Vietnamese enterprise listed
in the Top 2000 world's largest enterprises by Forbes
Magazine in 2012. In 2012, the total assets of the
bank was 503.5 billion Vietnam Dong, with owners
equity of 33.6 billion and a charter capital of 26.2

billion (Vietinbank, 2013). State ownership,
represented by the State Bank of Vietnam, accounts
for 89% of the total ownership interests in the bank.
In 2013, the charter capital was raised to 37.2 billion,
with 35.5% of the outstanding shares listed on the
Hochiminh Stock Exchange.
In the first month of 2014, observers in Vietnam
became aware that an ex-official of Vietinbank, Nhu –
the former manager of risk management division of a
Vietinbank branch in Hochiminh City, had been
convicted of illegally appropriating assets, forgery
and defrauding personal clients and other banks of
about 4,000 billion Vietnam dong (equivalent to
US$200m). She had started by borrowing millions of
dollars in 2007 from financial institutions and
individuals with extremely high interest rates around
1% to 3% per day to finance her real estate deals.
When she was unable to repay these loans, she started
to forge documents to withdraw money from
Vietinbank accounts. Nhu carried out this fraudulent
borrowing for more than a year, and all the
transactions were between Vietinbank and other
banks and individuals and conducted in Vietinbank
premises. She claimed to be raising funds on the
bank's behalf.



Figure1. Money flow in Vietinbank Scandal 2014

From March 2010 to September 2011, Nhu used
similar fraudulent techniques to withdraw money
from the accounts of nine companies, three banks and
three individuals with a total value of nearly 4,000
billion Vietnam Dong. The banks included Navibank,
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

228
Maritime Bank and the Asia Commercial Bank
(ACB).
From May 2010 to November 2011, ACB had
entrusted 19 staff members to make trust investment
contracts with Vietinbank with a total value of
VND719 million. All those contracts were supposedly
entitled to interest rates higher than the ceiling rate
(14 percent) set by the State Bank of Vietnam by
3.8% to 4.5% annually. In the same way, the
Maritime bank had also entrusted with Vietinbank
2,500 billion, Navibank 1,500 million and Tienphong
Bank 1,860 billion. In the final count, ACB had lost
lost 716 million, and Navibank 200 billion in this
fraud.
After individual clients had deposited money
into their Vietinbank accounts, Nhu then forged
clients’ signatures and stamps to make saving books
under the clients’ name. Then, she used those saving
books as collateral to acquire loans from Vietinbank
and other banks (such as the Vietnam Internationa
Bank – VIB). When Vietinbank discovered that all the
loan documents were forged, Vietinbank still

withdrew money from the collateralized saving books
to compensate for the loans it had made.
At first, Vietinbank rejected any obligations to
the clients who had lost significant funds by arguing
that all the trust investment contracts with Vietinbank
were forged and all the money had not been put into
the bank’s financial records, and all the transactions
were not in Vietinbank premises. However, under
pressure from the individual victims and
organizations, the bank declared that it would be
responsibe for honouring the legal contracts in this
case. Lawyers acting for the individual and corporate
victims submitted bank statements to the court as
evidence that all the money had already been put into
Vietinbank system and was reflected in the bank’s
accounts.
Ultimately Nhu was found guilty and was
sentenced to life imprisonment. However what has
angered people is the decision of the prosecutors to
clear Vietinbank of any liability. This fraudulent
scandal reflects badly on both micro and macro
corporate governance issues in Vietinbank and other
banks and Vietnam in general. The bank’s board of
directors had failed to prevent the management
implementing a deposit and saving policy that
supplied interest rates higher than the legal ceiling
rate. In addition to failing to audit and detect
weaknesses in the transaction system and procedures,
the failure put the bank at a high risk of capital loss.
In fact, ACB and Navibank did lose a large amount of

funds in this case.
There had been illegal transactions not only
between individuals and respective banks, but also
between banks with other banks. This helped to
unearth a significant failure of the legal interbank
transaction system in meeting banks’ capital demand
and a corresponding failure of policies. In addition,
auditors, both private and state, had carried out
several audits on the bank during the time of this
major fraudulent activity, but they failed to discover
anything amiss.
This case of fraud has certainly highlighted that
there are still major concerns and difficulties with
corporate governance practices and processes across
the corporate sector in Vietnam. There is still a lot of
work to do to embed best practice and effective
corporate governance models that are capable of
working as required in the Vietnamese context.

Conclusion

Corporate governance frameworks are still evolving
in both developed and developing nations. The
common approach is not to take a legislative path to
ensure effective reform, rather the process has been
one of developing principles, guidelines and codes
that effectively construct a ‘best practice model’ of
corporate governance. However, it is also clear that a
‘one size fits all’ model is not applicable across the
globe. There is a clear need to construct corporate

governance frameworks that are situationally
contextual and appropriate to different regions and
nation states. In particular, the notion that a Western
developed corporate governance model can be
imported without change into the ASEAN region is
problematic.
This paper has highlighted a range of issues that
has confronted decision-makers, government and
other major stakeholders in Vietnam when attempting
to construct an appropriate corporate governance
regime that will be appropriate for this developing
nation. The details of the fraudulent case in the
Vietinbank highlight a key point in the corporate
governance debate. Ultimately, the approach required
is to enhance and promote effective performance and
behaviour amongst board directors to help deliver
effective and good corporate governance without
utilising a big legislative stick as a threat.
The underlying reality of corporate governance
practices in Vietnam is that the quality of corporate
governance is below international standards and is
only currently at a medium level of quality. The
Vietnamese government has actively developed an
enhanced and more complete corporate governance
framework, and international institutions in the
country have actively supported these developments,
but the passive attitude and nature of the companies
themselves is slowing down the embedding of
improved corporate governance practices. The roots
of this problematic situation are located, fistly in the

civil-law-originated legal system used in Vietnam,
and also the existence of an institutional system that
over-prioritizes the role of the government in the
economy, and finally, a socio-economic environment
with opportunities that allow for unprofessional
business practices to prosper. Such features weaken
economic incentives created by contemporary policies
and make it difficult for companies to practice good
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

229
corporate governance. Vietnam still has a long way to
go in the field of corporate governance.

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231
IDIOSYNCRASIES OF TAKING RISK: A CASE OF A SOUTH-
ASIAN CONTEXT

Helan Ramya Gamage*, Ananda Wickramasinghe**

Abstract

Risk taking is fundamental to entrepreneurial activities and a central theme of the entrepreneurship
literature. However, research on the risk taking propensity of entrepreneurs has met with virtually no
empirical evidence on how socio-cultural factors influence on taking entrepreneurial risk in the
context of South Asia where entrepreneurs consistently face challenges of high uncertainty due to
socio-cultural and politico-economic complexity and instability. Purpose of this paper is to address
this paradox by examining entrepreneurial risk through the lenses of socio-cultural, politico-economic
and decision making.
Given the self-evident that nature of complexity, irrationality and uncertainty in this context, a
sophisticated exploration of entrepreneurial social reality of risk taking and management requires the
fundamental philosophy of subjectivism and therefore this study adopts qualitative inductive case
study methods in a sample of Sri Lankan entrepreneurs. The study found that entrepreneurs do indeed
use their social and cultural understanding to a great extent in their decision making.

Keywords: Entrepreneurial Risk, South-Asian Entrepreneurialism, Socio-Cultural Impact On
Entrepreneurship, Uncertainty, Rational Risk Taking Model


* Senior Lecturer in Entrepreneurship, James Cook University, Singapore
Email:
**Senior Lecturer in Strategy and International Business, Sydney Business School, University of Wollongong
Email:

1. Context

Entrepreneurial risk as a fundamental element of most
entrepreneurial decision making, it has been appeared
from the time when the word ‘entrepreneurship’
originated from the French verb entre-prende
5
in
Europe in the 1100s. Risk-taking has been persistently
associated with entrepreneurship ever since 1848
when Mill proposed that the bearing of risk was what
differentiated entrepreneurs from managers (Carland
et al 1984) and this is still the case (Stevenson 1999;
Gamage 2004). Risk taking behaviour of the
entrepreneur has been observed by economists
(Knight 1921; Schumpeter 1936) and psychologists
(McClelland 1961). All these conventional theories ,
models and ideologies of entrepreneurship embrace
that risk can be calculated and moderated through
knowledge and the process of rational decision-
making (Haley &Stumpf 1989; Miner et al 1994).
Most of theoretical and practical reasons promote for
generating greater knowledge about the effect of
situational and personal characteristics on decision-
making under risk (Blais and Weber, 2001). Even
though the effects of risk, risk perceptions, and risk
propensities of entrepreneurs on entrepreneurial


5

'Entre’ stand for 'between' and 'prendre' being for ' to take’
or ‘to undertake’ (Bolton et al. 2000).
choices have not been explicitly examined in
empirical research (Forlani and Mullins, 2000).
Sitkin and Pablo (1992) in their model of risk
behaviour argue that the available research on risk
taking have been focused on a single determinant of
risk behaviour, which can yield contradictory
empirical findings and produce inaccurate conclusions
about determinants of risk behaviour. There is a gap
in our knowledge about the link between risk taking,
risk propensity, and risk perception in the context of
social, cultural and political and risk (Gamage 2004),
which required entrepreneur's social wisdom to
manage risk in a context sensitive approach. In this
paper, socio-cultural values are of particular relevance
to understanding entrepreneurial risk in the South
Asia as a social phenomenon. The philosophy of
empowering entrepreneurs in Sri Lanka is largely
based on the theories and models that have arisen,
predominantly, from western paradigm and are
largely based on rational scientific approaches to
analysis, which are not directly appropriate to the
cultural perspectives necessary for entrepreneurship in
South Asian countries.



Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

232
2. Critics on the Mainstream Perspectives
of Entrepreneurial Risk

From the 13th century onwards permissible free
competition emerged in western society (Gay 1923
cited in Aitken 1965) and this developed further with
the growth of international trade. Large-scale
enterprises in industrialisation involved risk bearing,
capital accumulation, and psychological and
organising abilities to approach and enhance unknown
international markets. The pioneers of
entrepreneurship, the classical economists Richard
Cantillan (1734), Adam Smith (1805), J.B.Say (1834),
and J.S. Mill (1848)focussed on the normal flow of
economic activitiesunder conditions of rational
individuals with ideal information in new, unknown
states of economy. According to Schumpeter (1936)
the entrepreneur is in a position to carry out new
economic combinations while Hirschman (1958)
emphasizes their importance in mobilizing resources.
This market-exchange economy required
psychological and material resources to organise
large-scale, mass production effectively and
rationally. These terms referred to functions and
qualities which were an exciting and unknown
experience taken at one's own risk (Greenfield
&Strickon 1981).In this institutional process
entrepreneurship has been defined as a factor of
production that carries risk and uncertainty in the

process of organising other factors of production
(Cole 1949).These conventional western ideologies
havegiven emphasis to the process of rational
decision-making in calculating and moderating risk
factor in relation to the process of organising factors
of production in market-exchange economy.
Enhancement of entrepreneurial performance
has been seen historically as possible through the
extensive acceptance of western ideologies.
Therefore, the influence of the west on ideas and
practices in non-western countries has been strong
(Sinha 1999). The rational risk moderation process
has been utilised in entrepreneurship development
programs in the South Asia (Sinha 1999; Gamage
2004). however, the aim of economic and industrial
development through application of western
ideologies has not remained unchallenged in
developing countries (Hofstede 1994; Kao et al. 1999;
Wickramasinghe & Hopper 2000; Gamage 2004).
This issue has been examined from different
perspectives. These include an examination of the
validity and transferability of knowledge (Leonard
1985; Sexton 1987), the utility and impact of such
knowledge ( Kao et al. 1999; Sinha 1999) and cultural
diversity (Hofstede 1980; 1984; 1994; Nanayakkara
1999; Adler 1997; Kao et al. 1999;Ratnasiri 1999;
Wickramasinghe & Hopper 2000). If culture supplies
the initial social conditions under which
entrepreneurial practices emerge, then the behaviors
and practices that constitute current notions of

entrepreneurship should be expected to fit the values
of the cultures that generated and shaped the
phenomenon(Mehdi and Ali 2009).From these
perspectives, management and work activities in an
enterprise depend critically on socio-cultural values
and indigenous management
practices,therefore,without considering the
complexity of indigenous society and culture, which
hinders attempts to understand entrepreneurial risk.

3. Exclusiveness of the Sri Lankan Socio-
cultural Setting and Entrepreneurial
Culture

Sri Lankan culture demonstrates various complex and
unique behavioural patterns. It has had its own
civilization for millennia, although from the 12th
century it was subjected to several invasions. The last
and the most dominant colonization was by the
British who ruled from 1796 until 1948. The British
influence caused significant changes to the original
socio-cultural setting (De Silva 1981; Mowlana 1994;
Jayawardena 2000). British colonialism was central to
the economic, political, and cultural construction of
modern Sri Lanka. The imposed British
administrative, religious, judicial and education
systems retain their influence (De Silva et al. 1973;
De Silva 1981). In particular the total education and
training system has been influenced in terms of
objectives, design, content, and methods by the west

(Ruberu 1962; Nanayakkara 1999a).
Sri Lanka received its independence in 1948,
and now embraces Asian, Western and other cultural
influences. After independence, Sri Lankan society
blended traditional culture with European social
structure (Ludowyk 1966; Jayawardena 2000). Sri
Lankan entrepreneurial culture can be said to have
evolved through two different routes. One can be
traced to the origins of Sri Lankan civilisation and the
other to the western influence, originating from the
Industrial Revolution, and imposed through
colonisation which systematically destroyed the
indigenous feudal system. Entrepreneurship literature
available in Sri Lanka either by way of imports or
local production, is almost exclusively western in
origin and character (Nanayakkara 1999a) or has
influenced academic and professional systems.
Similarly, the personnel involved in bilateral and
multilateral assistance programmes have also spread
western ideology through training programmes. It is
clear that western knowledge in Sri Lanka is
influential. However, observations from India show
the heart and the mind of such a system often do not
work together and this conflict is apparent (Khare
1999).

4. The Research Approach and Design:
Holism and Qualitative Methodology

The dynamic interaction between the social context of

entrepreneurial activities (including risk) and the
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

233
complexity of the South Asian culture invites an
alternative approach to understand its entrepreneurial
risk. The emerging research philosophy outlined
above built on a set of beliefs and feelings about the
world (ontology) and how it should be understood
(epistemology) and studied (methodology) (Denzin&
Lincoln 2000). The exploratory nature of this culture-
based research embraced the fundamental philosophy
of subjectivism. Hence this paper attempts to
understand and document whether entrepreneurial risk
in South Asia is critically dependent on social values
and indigenous business practices.
The exploratory nature of this culture-based
research embraced the fundamental philosophy of
subjectivism. A qualitative research methodology and
inductive holistic case study approach including
grounded theory analysis were selected to explore
people’s experiences and behaviour. This paper
analyse entrepreneurial risk factor in the Asian
entrepreneurs through a case study approach that
focussed on ten entrepreneurs who started up home-
based businesses and which have grown to become
significant in Sri Lankan society. This allowed
context sensitive theoretical understanding of
entrepreneurial risk taking reality in Sri Lanka to
emerge. Hence, this study used purposive sampling to

select informative case studies.
The study sought to understand the subjective
realism rather than to impose objective rationalism
(Mason 1996). Therefore, the researcher did not have
preconceived beliefs in exploring social realities.
Interpreting and understanding the meanings of social
reality through close interaction with the knower and
the known (Denzin& Lincoln 2000) required active
interaction between the researcher and the individual
or community experiencing the phenomenon.
The inductive and holistic study of human
experience required qualitative methodology to
explore the inward and outward interactions of
entrepreneurial experience. Using a qualitative case
study approach, the problems of questionnaire-based
scientific studies (cf. Perera 1990; Turner 1993;
Chetty 1996; Gummesson 2000; Wickramasinghe &
Hopper 2000; Gamage et al. 2003a; b) could be
overcome. These problems include: a reliance upon
the logic of sampling for statistical generalisation by
testing hypotheses derived from predetermined
theory; belief in an objective reality ascertainable
through a ‘falsification process’; and an erroneous
belief that ‘scientific’ methods enable researchers to
be objective and neutral recorders of events
(Wickramasinghe & Hopper 2000).
In this study, timeframes of the case study
subjects were between 13 and 41 years. Therefore,
these entrepreneurs had up to 41 years of experience
of the phenomenon (see Table 1). The long period of

experience in business revealed how entrepreneurial
activity changes over time.

Table 1. Age of the businesses selected in this thesis

Case
study
One
Two
Three
Four
Five
Six
Seven
Eight
Nine
Ten
Age in
years
21
21
22
41
22
31
13
22
20
25

Ten entrepreneurs were interviewed and all these
businesses were based in Western Province in Sri
Lanka. This study is longitudinal and first round of
interviews conducted in 2002 and second round of
same study conducted in 2012.
Using detailed stories of small rich informative
case studies enabled the researcher to gain a relatively
complete picture (Eisenhardt 1989a) of the range of
entrepreneurial experiences. This study applied a
grounded theory technique of constructive thematic
generation to provide a language to describe the
findings (Strauss & Corbin 1990). Themes emerging
from the empirical data required further iterative
processes to explore the foundation value sets (social
meanings) underpinning particular actions. The
foundation value sets discovered were interpretations
of socio-cultural realities in the context, based on
understanding how entrepreneurial behaviours fit in
the society and culture. The literature about the
historical origins of religions and politics also
contributed to understanding the deep-rooted reality
of behavioural patterns and actions within society.
This led to insights into entrepreneurial performance
in Sri Lanka.
The amount of data generated by qualitative
methods was extremely large. Organizing and
analysing the data could have appeared to be an
impossible task (Patton 2002). The data analysis
software tool, ‘Nvivo, Qualitative Data Software’ was
used to manage data efficiently throughout the course

of the research project (Silverman 2001; Patton 2002).
Credibility and reliability of data were achieved
through data triangulation (Denzin 1989; Yin 1994;
Silverman 2001). Multiple sources of information
were sought, and the interview scripts were presented
back to participants for verification.
The research output was described using words
and illustration rather than numbers (Penrose 1990;
Miles &Huberman 1994). This style of analytical
presentation of output in terms of storytelling has
attracted a number of management and
entrepreneurship researchers (e.g. Turner 1993;
Chetty 1996; Gummesson 2000; Greenhalgh 2000;
Workman 2001). The research methodology and
methods went beyond those previously employed
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

234
within the culture and entrepreneurship area in Sri
Lanka, to capture insights of entrepreneurship in the
Sri Lankan context.

5. Empirical Evidence: Uniqueness of Sri
Lankan Culture and Entrepreneurial Risk

In this exploratory study it has been found that with
the socio-cultural environment in Sri Lanka, the
contextual reality of managing risk challenges the
underlying assumptions of rational risk management
processes.In cultures that are different from the west,

as in Sri Lanka, conventional theories of rational risk
taking process are inconsistent with the national and
the local cultures. For example, Sri Lankan businesses
try to preserve their paternalistic system, and
emphasise socially boundedrelations, and rightness,
trust, loyalty and collectivism (Nanayakkara 1999a;
Gamage 2004). These are the pillars of the Sri Lankan
cultural system. In this context, five main themes
have emerged in entrepreneurial decision making
onrisk taking. These themes involved:

5.1 Entrepreneurial risks shape from
socially driven uncertainties

The data suggest that social uncertainties in Sri Lanka
are critical in influencing entrepreneurial risk.
Evidence is provided by thecases; all were
emphasised that "we are making business decisionsin
the dark environmentdue to political instability, lack
of reliable information and violence of youth
organisations".Periodic promises given by politicians
about reducing power-cuts had disrupted
entrepreneurial activity as they were not realistic
promises. These situations influenced to close down
their business activities andalso profitable
international business lines. Some cases indicated that
as a result of these circumstances, international
customers have approached other country suppliers.
One of the entrepreneurs expressed his
disappointment:

How can we predict our business? More than
three to four months continuous power limitations (at
least two hours in daytime and another two or three
hours evening or night) have occurred each year in the
last six years. Productivity and achieving targets have
been affected. Furthermore, unrealistic promises
given by politicians about ending power-cuts have
disrupted entrepreneurial operational activity.
Social uncertainties had been transformed into
different forms of risk in entrepreneurial activity. For
example, risks in decision-making on production,
continuation of business activities and exporting
products in time, and approval and smooth production
processes resulted from social, political and
economic instability, which has turned the
entrepreneurial environment into a more uncertain
realm. More than 20 years of continuous ethnic civil
war and youth unrest due to poverty, unemployment
and imbalances in income distribution have led to the
uncertain socio-political milieu. Moreover, changing
weather conditions in the last few years resulted in
disruptions to the hydroelectric power system which
was unable to cope with the increasing usage of
electricity by household, commercial and industrial
sectors. Most entrepreneurs get used to such
uncertainty because they see no other alternative as
they are uncontrollable and unpredictable and could
not be seen them throughthe rational process of
forecasting and moderating risk.

5.2 Generating Risk: the social disorder
matters

Most entrepreneurial challenges were derived from
the disorder of the social system in Sri Lanka. The
case exemplified a lethargic social system where
things just do not move efficiently, is it in banks or
government departments, creating delays, time-
consuming practices, and the need for political and
personal favours or conversely, knocks to business
activity. Time management is a top concern of
entrepreneurial success as they have to use their time
more efficiently. Several entrepreneurs expressed
their disappointment on the time factor; higher
waiting period for getting things done. Entrepreneurs'
experiences in several respects:
Within the last two months three times, tax
department people came to the company and asked for
the same bundle of files and they took all those files
and brought them back. Three times office people
traced files and replaced files. Taking time of the
workers directly affected to the productivity and
achieving production targets.
The Bank asked us to come several times to
discuss our loan. Every day they told us something
and discouraged us. This was the initial experience of
getting a loan to start my business.
Another entrepreneur’s experience on
discrimination on issuing bank loan at the setting up
stage of the business:

For a Rs. 500,000 bank loan, bank requested
securities for the loan. Finally two guarantors were
found but one higher officer in the bank has refused to
approve the loan by saying that, who is giving a loan
for this kind of man ThelBehethkaraya who produces
traditional oil treatments (this has a very sarcastic
meaning). Again loan was rejected.
Afterwards entrepreneur had to arguewith the
Chairman of the Bank to show him the rules and
regulations that indicate ‘no bank facilities are
available for oil treatment businessmen'. The reality
is, there was no such regulation in the process of
issuing loans but personal subjectivity/biases were
involved in making decision on loan to grant or not.
This has created stress, uncertainty and risk not
in business aspect but also health aspect of the
entrepreneur. In the absence of an adequate legal
framework, informal constraints play a large role in
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

235
the society. In Sri Lanka, political influence especially
often greatly helped in getting permission to access
resources and enters local and international markets.
This was evident in Cases, the entrepreneur’s political
relational power was used to handle threats to the
existence of their businesses.In the political context of
Sri Lanka, government authorities and politicians
often acquire power by which they override some
rules and create situations that are governed not by

rules but by the power of particular individuals. These
discretionary and personalised favours generated
entrepreneurial risks on the one hand or eliminated on
the other. The entrepreneur, who operates in such an
environment of frequent social disturbances and
constraints derived from inadequate social, political
and legal structures, is unable to readily manage risk
through rational planning (Nanayakkara&Ranasinghe
1984; Nanayakkara 1999a; Gamage 2004).
Entrepreneurial risks associated with time,
favourations, biases, stress, disappointment, changing
promises and letting entrepreneurs down could not be
even calculated and moderated through the rational
process of entrepreneur risk.
The data also suggest that dishonesty and
bureaucracy of most government authorities was a
formidable challenge to entrepreneurial activity. This
was supported by the statement of entrepreneurs.
" Everything needs follow up actions. If we
wait until they do it, it will not happen. We have to
push them to get things done by government
authorities".
Because the political and public system and
organisations often did not incorporate commitment,
honesty and respect, the opportunity existed for
opportunists to set up monitors and controls as
necessary requirements from the social system.
Evidence from one of the entrepreneurs who had
experience on influence of multinational companies.
"Some multinational companies wanted me

eliminated from the market. … They never allowed
me to use the Sri Lankan name for my product. I
thought, my product is a Sri Lankan product, why
can’t I use a Sri Lanka name for it. So without
approval I had to stop my business for two years.
Multinational companies have distracted
indigenous entrepreneurial activities.
Another case highlighted that bribery was
demanded in order to continue the order for the
product.
'While I was producing the order one officer
asked for a bribe and I thought, why should I give a
bribe to sell my product? I refused to give a bribe.
Then suddenly they stopped my production while I
was continuing my production process. My business
totally collapsed.'
In these cases, the entrepreneur’s high social
morality increased his exposure torisk within such
disorder of the social context.
The following statements indicate another social
disorder that is the lack of implementation of proper
customer protection in the legal system and unethical
behaviour of some business groups in the society.
Entrepreneurs are willing to take challenges and risk
related to the business activities but they believe that
socially driven unethical and illegal influences are
very challenging and create big risk for
entrepreneurial activities.
'One competitor made the same product and
used a similar type brand name. Anyway, customers

complained about our products. We had to find this
unhealthy competitor and we found his production
system was totally outside hygiene requirements. The
lack of implementation of proper customer protection
in the legal system is a big risk for entrepreneurs'.
'One very popular product suddenly was rejected
by the customers. The whole production was stopped
and the raw materials were examined by sending them
to another country. Then we realised some fraud was
happening to our imported raw materials. It could not
be traced at the quality control as that chemical was
activated in a couple of days. So we had a big loss;
however, those are some experiences and business is
difficult in such an unethical environment. Otherwise
business is a challenge that can be taken'.
Organisational corruption and political
influences are prevalent. As a result, unethical
transactions and actions are usual in day-to-day social
life. Most cases provided evidence that in their
entrepreneurial journey, the entrepreneur’s personal
and political relations, respectability and also
willingness to give bribes were forceful. The legal and
social security system is still need to be improved in
Sri Lanka in order to avoid unnecessary risk for the
entrepreneurs.
The following cases were exposed that
businesses were frequently influenced by the actions
of government organizations.
Six months after increasing my workers’ salary,
the government announced a general salary increase

and asked all private companies to follow the same
rule. So if we do not follow the general rule workers
make problems. Fortunately, I could afford that
because the Dollar exchange was positive at that time.
Socially driven risks were more harmful and
more powerful than market driven risk in
entrepreneurial activity.This uncertainty and risk in
the Asian context has been studied by Hofstede
(1980), he asserted that uncertainty is rooted in
culture and reinforced through basic institutions such
as family, school, and the state. Business uncertainty
and risk initiation were therefore often critical, and
social and cultural, and could not be separated, as
business is a part of society.

6. Being Inquisitive About Others:
Perceptions and Management of Risks

In Sri Lankan society and culture, people are
concerned and inquisitive about others’ behaviour and
performance and this builds negative or positive
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

236
attitudes to which they react. This includes jealousy,
frustration, resentment, anger and personal politics, all
of which potentially operate against the entrepreneur’s
wellbeing and piliganeema (SP). These confrontations
were understood as either politically motivated (often
resulting from opportunistic political forces) or due to

human emotions.
The data suggest a range of perceptions on
entrepreneurial risk taking behaviour within the social
cultural context. Some risks were seen as personal and
are kept covert; others were seen as social and
collective, and made overt, were managed
collectively.

6.1 Failures as Social Confrontation and
Accepted as a Personal Risk

The data shows that most failures and social
confrontations were kept at a personal level. The
following statements provide evidence:
When my product was suddenly refused by the
Department … I met a minister several times …but he
was deaf to me. I went to Japan but nobody knew the
reason. …when I came back I saw unsold production
was stocked in the factory. What I did without telling
my workers was to remove it all to my house at night.
As a leader I should maintain my respect and try not
to create a feeling of my incompetence among
workers.
Once our product was upset due to fraud
happening to our imported raw materials. We had a
big loss. It is very unethical in business perspective.
However, we (certain Directors) kept this incident a
secret. I know they (who did the fraud) wanted to
eliminate our social and business dignity.
Socially unethical challenges such as creating

frauds against the entrepreneur because of anger and
jealousy were often taken personally and therefore
entrepreneurs tried to manage them individually. It
was assumed that personal challenges are aimed at the
piliganeema (SP) of the entrepreneur; in turn
entrepreneurial dignity would be damaged by the loss
of confidence of workers, buyers, suppliers,
supportive organisations and society. For example, if
subordinates’ confidence, respect and loyalty were
lost, work commitment seemed to disappear from
workers.
The entrepreneurs interviewed seemed to
perceive the necessity to take into account both
personal and business risks (Osborne 1995) and also
social and psychological risk (Gasse 1982; Ray 1986)
which had been identified as typically involved in an
entrepreneur's risk-taking. According to the data, in
Sri Lanka, the entrepreneur felt shame (embraced
social concerns and feelings) in relation to a particular
fault or error. According to Bradshaw (1988)
6
, with
shame, there are painful feelings of alienation, self-


6
With guilt, the response is a desire for atonement, to make
amends, to correct a mistake, or heal a hurt (Bradshaw 1988:
Healing the shame that binds you)
doubt, loneliness, isolation, perfectionism, inferiority,

helplessness and hopelessness. Entrepreneurs were
ashamed to show their powerlessness (especially
those who held some power and dignity) and they
kept social confrontation covert to protect their SP
with a motivation of securing workers’ and other
stakeholders’ confidence, loyalty and commitment.
This was different from guilt which is determined by
objective criteria (Kaufman 1996) in an
individualistic context (Bradshaw 1988).

6.2 Collectivist or What? Business
Challenges as Shared Risks

The following cases best illustrate shared risks.
Through my experience (both failure and
success) I know what to do in the operation of the
business and the market. I use my experience with my
workforce’s capabilities to face these challenges. I
can give my knowledge but workers are important in
carrying them out. So I shared my vision, business
challenges and internal issues with my employees to
face them. I always remind them if we take risk
together we can easily win. Then we will be better
off.
I told my workers, this is yours. If you are
committed to grow this business, there are no
problems for us to face business challenges and to
grow. We have to work together to win business
challenges.
Ethically driven business challenges such as

healthy business competition were accepted
collectively in Sri Lanka. Both management and the
workforce were encouraged by collective obligations
to face business risks. Verbally and visually, the
entrepreneur always moralized collective norms by
experientially creating a collective risk-taking culture
and displaying posters on the strength of togetherness.
Observations revealed that, in several
challenging situations, most entrepreneurs addressed
their subordinates very colloquially. The expressions:
Umbala (you), Kollani(boys), Putha (son), Duwa
(daughter), Daruwo(child),Nubala(you) and Lamai
(child), represent closeness, togetherness and
familiarity.Thesewordsgive a different sense of
relationships. Putha, Duwa, DaruwoNubala and
Lamaiindicate familial (parent and child)
relationships, love and caring; Kollani and
Nubalaalwaysrepresent a feeling of an advisory
relationship between an adult and a young person; and
Umbala and Nubalashow friendship. In general,
people in Sri Lanka show strong friendliness and
closeness by using specific colloquial words in
conversation with friendly facial expressions.
The system had a built-in resistance to
individualism. Familial emotions had been built up,
developing a real sense of belonging to the
entrepreneur or to the company in which caring,
obligation and taking risks together operated between
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

237
subordinates and superiors through paternalistic
approaches
7
.
We understood that there was no specific
demarcation between social confrontations and
business challenges. The entrepreneur in Case Six
considered business fraud against his product as a
social confrontation. The entrepreneur in Case Five
considered the business fraud of another business
producing a similar product with a similar brand name
as a business challenge. This provides evidence that
entrepreneurial risk was perceived and interpreted
subjectively within an individual context.

6.3 This Is How We Manage Risk:
Through Social Power and
Conceptualisation Skill

The data indicate that loyalty and respect from
supportive authorities were derived from
entrepreneurial reputation, professionalism, and trust.
As a result, personal favours were highly possible.
Interviewed had with third parties revealed that:
We (fruit sellers at the Nugegodapola) always
give him (the entrepreneur) our fruits. We do not
allow our new people to sell to others first. If we want
we can sell our fruits very easily to hotels and
retailers for higher prices, but we never do it. We can

still remember how kind he was to us in the very early
stages of our business. If we ask for personal help, he
never says ‘No’. Sometimes, he helps us financially.
We take money from him in advance until fruits are
supplied. He helps our urgent situations like funerals.
He is really a gentleman. (Some fruit suppliers to the
business)
We encourage customers to buy “(name of the
company)” products because this Mudalali (the owner
of the business) gives remarkable service to the
society. He is also very concerned about us. He looks
after us. He wants us to grow. We appreciate his
caring for us and the country. (Some retailers in the
business)
According to Case below, the entrepreneur
appeared to take an unnecessary risk by not doing
sufficient research or analysis before acting.
I do not know anything about theories of
planning; I don’t do any market research or formal
systematic analysis before acting.
However, this was not the reality. The data
suggest that his key skills in managing risk were
based on a social capacity for value judgements. The
following case evident more on this social and value
judgment on entrepreneurial decision making.
I learned everything by painful experience in this
society, their behaviour (good and bad), political
situations, I have a good vision towards the future of
this business and alternatives though we do not have
more business information. These come from my

7
Paternalism’ or ‘paternalistic approach’ in this study is used
to signify caring and obligations which operate between
subordinates and superiors.
painfulexperience. Experience is not really the
business techniques but about people and society. It is
difficult me to explain but my social insight give me
wisdom, vision and directions. These cannot be put
into a written document. I cannot give my experience
to anybody, even for my son. They have to earn such
painful experience by their own and learn.
The entrepreneur often processed myriad bits of
information available to him and conceptualised
several alternatives, in depth, through his social
wisdom before he acted. The only market-related
factor of any importance was personal knowledge of
the market. The entrepreneurs’ previous experience of
failures had expanded their wisdom; giving them
confidence they had the skills to avoid failure in
future. Social knowledge and the insights gained
through painful social experience emerged from most
case studies relating to risk management and future
planning.
Risk management through value bases and
conceptual skill were best illustrated in worker
recruitment policy. For examples:
When I recruit my workers I am so concerned
about their family background. That means, the poor

village type, and humble.
I specially recruit the poor, disadvantaged group
of people to work. There are many reasons. a) If we
help them they are very grateful and they do not want
to leave the company. b) We have higher officers who
were promoted from the very lower level and they are
also from such family background. If I take high-
class people then it creates internal unbalance and
problems among workers. c) High class people have
several opportunities in the society and they try to
leave the company more often.
Entrepreneurs preferred workers who are loyal
and reliable rather than technically qualified. This
basically deviates from seeking work efficiency and
higher productivity in the process of human resource
management. Entrepreneurs were found to have set a
priority forwork harmony on the basis of social
wisdom. In general, workers in Sri Lanka display
strong collective behaviour in demanding rights. An
issue related to one worker affects all workers’
productivity through strikes or ‘work to rule’ until the
particular worker’s problem is resolved. Sometimes
this issue leads to union actions and continues for
months, potentially causing the total business to
collapse. This requires the entrepreneur to consider
the workers’ social behaviours and contrasts with a
problem such as technical know-how, which could be
handled through on- the-job training or external
training. The ability to conceptualise possible social
challenges allows him to deal with risk through social

value judgments.




Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

238
6.4 Luck and Karma in Risk Tolerance
Behaviour: Religion Matters

Religious faith in Sri Lanka leads to ‘Luck’ and
‘Karma’. Casesillustratethis effect:
Buddhism believes in a systematic mental
culture. To the question of how to eradicate problems,
the answer given by the Buddha is 'when a wise man,
established well in morality (sila) has developed his
mind and understanding (panna) which has been
developed by moral and intellectual investigation
rather than fixed by rational and economic figures. I
always work according to Buddhist concept of sila
and panna in relation to business activities. This
Buddhist guidance is the precaution of my business
risk.
The entrepreneur understood that Buddhism
teaches the way to penetrate to the root of the problem
(similar to the western analytical approach) and find
out the main cause of it within the social moral
context (different context from western countries).
Individuals were guided by their religious norms to

become more skilled in managing human life and to
promote more satisfactory living.
Suddenly my Sri Lankan buyer refused my
product …. My friend in Japan was able to help me.
He is the first man in Japan going out of the country
to buy such products. So I believe we should have
luck also when doing business.
While …one officer asked for bribery and…my
business collapsed, that is my karma…. The garment
industry has been introduced in Sri Lanka on a very
large scale. And also imports of printing ink have
been limited. This was my luck to come back to my
business. . I believe in karma, as I am a Buddhist.
Some have got every human organ without
imperfection, but some people are born with several
problems, that is our karma. So I have to maintain
behaving in such a way as to get good karma.
It was a big threat of multinational products like
Coca Cola for us. I had a very hard time selling our
natural fruit drinks. Some small boutique traders
chased me when I brought my product. However, our
luck came. Fortunately, television media came to Sri
Lanka and fresh fruits and health care programmes
were broadcasted. It was a new media and people
were so interested to try to follow what it showed.
This made a big impact for our business. So I believe
we need to have luck also.
Lack of information and unforeseen conditions
led to unavoidable uncertainties. In such situations
where the entrepreneur had no power over exterior

influences he resorted to religious faith. The
entrepreneur was persuaded with luck and karma.
Religious faith and values rooted in religious morality
were part of the social behaviours and provided
satisfactory compromises between unexpected failure
and success.
In Buddhist values every material thing that
exists is impermanent. But the good and bad points
collected in life (Karma) are carried forward to the
next life. Therefore, every living being has the results
of its own past karma to work out, and any
interference with his situation will not be anything
more than a temporary alleviation of the suffering it is
bound to endure (Pickering 1995). The impact of
uncertainties was neutralised in terms of karmaand
luck. Therefore, any impact of uncertainties had been
taken as tolerable. The majority of Sri Lankan
entrepreneurs (86.6%) believe in Karma (Buddhdasa
1995). Entrepreneurs did not see uncertainty as
something to be avoided or moderated in any
particular rational model but to be expected and
tolerated through social and religious faith and
morals. This is the key difference from western
thinking on risk management.
All four main components of entrepreneurial risk
management described here: risk initiation,
perceptions of risk, risk management and such
tolerance indicated that business uncertainty was
mainly derived from social, political and cultural
settings. The business stakeholders and socially and

politically influential actors, government authorities,
their spouses, relations and friends were all involved
(formally or informally) in the risk handling process
in terms of creating personal favours. This is
supported by studies of business risk in the Asian
context by Hofstede (1980) who asserts that strategies
for coping with uncertainty are rooted in culture and
reinforced through basic institutions such as family,
school, and the state. This does not mean that markets
are not subject to risk, but that business risks in Sri
Lanka were largely socially derived, were powerful,
and demand widely developed conceptual skills for
effective management.

7. Irrationality of Entrepreneurial Risk
Taking: Contrary to Western
Entrepreneurial Paradigm

In the western models, entrepreneurial risk can be
managed through knowledge of and entrepreneurial
alertness to markets (Kirzner 1973; High 1986) and
the process of rational decision-making. Classical
economist Knight’s (1921) classification of
entrepreneurial risk includes perfect knowledge, risk
and uncertainty. Schumpeter (1936) asserts
entrepreneurial risk-taking behaviour in innovative
economic activities which implies risk taking in a
rather uncertain condition of novelty. Research
supports the idea that firms that innovate and are
proactive also tend to take larger risks (Miller 1983;

Covin 1989; 1991).
The neo-Austrian school believes
entrepreneurial riskinteracts with the internal situation
of the business and with the economic, political and
social circumstances surrounding the business (Cole
1949). The Harvard School considers the human
factor in the production system as well as sensitivity
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

239
to environmental characteristics that affect decision-
making.
McClelland’s (1953; 1961) psychological theory
also discusses business uncertainty and certainty
based on availability of reliable information to the
entrepreneur. He argues that risk involvement is
essential in undertaking a venture and such risk can be
moderated through logical analysis of information.
Furthermore, in his theory of n Ach, a large
incongruity between an entrepreneur’s aspirations and
end results leads to avoidancemotives (McClelland
1953) as far as personal achievement is concerned.
From this, if business risks are defined in terms
of economic and psychological connotations, business
risk is focused by (the western paradigm) only on a
firm or an individual entrepreneur. However, business
uncertainty and risk are often socially and culturally
interpreted and cannot be separated, as business is a
part of society. The country’s social conditions and
cultural values provide the ingredients for critical

risks for the entrepreneur and lead to a definition of
entrepreneurial uncertainty as ‘socially-derived
doubts’. As a result, different issues emerged in
entrepreneurial activity and were identified as
entrepreneurial risk factors.
Risk calculated by predicting and forecasting
economic effects was insignificant in the context of
possible social challenges in Sri Lanka. This
challenges Kirzner’s (1973;1979) and High’s (1986)
arguments of risk management through knowledge of
markets and entrepreneurial market alertness. In Sri
Lanka, entrepreneurial risk management was both
defined by and managed in a social context rather
than an objective cognitive context. Whether the
entrepreneurs want to moderate, tolerate or avoid risk
was rooted in their values and beliefs system.
Conceptualisation of business risk was subjective and
antithetical to the psychological theory (McClelland
1961) and to moderating risk and risk-avoidance
(Miner et al. 1994) through rational approaches. The
market mechanism in risk management therefore
worked loosely in Sri Lanka (Gamage et al. 2003a)
Deep understanding from the findings led to a
guiding model for business risktaking and
management in Sri Lankan (Figure 1), which
discriminates between the social and business
implications of business risk. This indicates that the
entrepreneur needs to build a wider risk- management
circle through value base in response to
entrepreneurial risk. This involves conceptualisation

skills not limited only to analytical skills and
approaches. Therefore, risk management requires the
entrepreneurs’ social wisdom to screen social risks
rather than simple knowledge creation of market
alertness.


Figure 1. Entrepreneurial risks and the risk management circle
Source: Develop by the researcher
Conclusion

Socio-cultural values and beliefs, which direct social
being, influence entrepreneurial risk behaviour in Sri
Lanka. Sri Lankan businesses cannot survive by
merely following entrepreneurial orthodoxy within
the western paradigm, which does not lead to
appropriate practices because conflicts and challenges
are palpable. In this research work found that in the
South Asian cultural context social wisdom and value
Corporate Ownership & Control / Volume 11, Issue 3, 2014, Continued -2

240
judgment is prominent and essential in understanding,
tolerating and managing uncertainty and risk which
are driven from socially and culturally. Sri Lanka
should not imitate a western system with its own
shortcomings. Sri Lanka should develop its own
strengths in entrepreneurship development. It needs to
understand how cultural values and practices are
reflected in the unique organisation of business.

Finally this study revealed that Socio-cultural-
relativism in entrepreneurship’, may be more
appropriate to understand entrepreneurial reality in its
context.
The authors propose that the entrepreneurial risk
may be explained by recognizing the fact that
entrepreneurs use experience-derived knowledge
including socio-cultural and politico-economic
intuition and wisdom to a problem, which is likely to
lead them to perceive multiple risks in a given
decision situation.
These findings provide a new perspective for
understanding how entrepreneurs deal with the
unjustifiable amount of risk associated with the
complexity of indigenous society and culture in the
South Asian context, which challenges the western
ideologies and practices of entrepreneurial risk. This
context sensitive understanding sheds some light
especially for policy makers, trainers and educational
institutions to develop more integrated and context
sensitive entrepreneurship development policies and
training and educational programs.

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