Chap. 3 corp. gov. in global operations.ppt.


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Chap. 3 corp. gov. in global operations.ppt.

  1. 1. Chapter 3 – Corporate Governance in Global Operations: Design and ActionsA. 1. Global operations influence corporate governance [ MNCs have extended their presence all over the globe, conducting a  multitude  of  activities  for  a  multitude  purposes.  MNCs  have  had  to  manage  the  various  forces  –  geographic,  product,  market  and  technology  –  that  interact  and  become  more  complex  on  a  global  scale.  The complexity of an MNC faces is directly related to its geographic  dispersion  for  several  reasons  including  but  not  limited  to  its  dependence  on  (a)  foreign  sales  and  value  creation  inputs,  (2)  the  diverse  institutional  and  task  environments  within  which  it  operates,  (3)  and  increased  competitive  pressures  for  cooperation  and  coordination across geographically distributed operations.
  2. 2. Corporate  accountability  is  concerned  with  the  extent  to  which  a  company  is  transparent  in  its  corporate  activities.  Central  to  corporate  accounting  is  the  widespread  availability  of  relevant, reliable and accurate information about a  firm’s  performance,  financial  position,  investment,  opportunities,  governance,  value  and  risk.   
  3. 3. • Accountability affects the investment and value of firm’s in three ways:• 1. By identifying promising investment opportunities• 2. By guiding managers to direct resources toward “good” projects and way from those that primarily benefit them over shareholders and stakeholders• 3. By reducing information asymmetries among investors and among the various stakeholders
  4. 4. Information-processing    theory  holds  that  a firm  s  are  open  social  systems  that  interface with  internal  and  environmental  sources  of complexity  and  a  firm  must  develop information-processing mechanisms capable of dealing with the resulting complexity.For  corporate  governance,  the  ability  of  the board  to  vigilantly  monitor  the  CEO  is  a function  of  its  access  to  information  and  its power to exert control. 
  5. 5. • Both information-processing and agency theory are ultimately with the efficient organization and distribution of information, and thus with information reporting and decision making accountability• Agency theory holds that organizations can invest in information system in order to enhance accountability and hence control opportunism
  6. 6. Information-processing  theory  maintains  that  organizations  will  be  more  effective  when  there  is  harmony  between  their  information- processing requirements and their information- processing capacityInformation-processing  capacity  is  critical  to  accountability,  which  requires  the  development  of  a  system  for  gathering,  interpreting  and  synthesizing    information  in  the context of organizational decision making
  7. 7. Globalization Scale and Corporate Governance Globalization is defined as the level or quantity of  an  MNC  active  foreign  direct  investment  (FDI)  over  which  the  parent  firm  maintain  control.  As  globalization  scale  increases,  information  processing and agency demands increase as well. Pfeiffer  and  Salancik  posit  that  increases  in  the  number  of  dependencies  between  a  firm  and  its  external  environment  are  likely  to  lead  to  increased organization ties.
  8. 8. Sander  and  Carpenter  argue  that  international firms  often  handle  increased  and  varied dependencies  by  adding  board  members  who increase  the  overall  information-processing   capacity  of  the  group  either  because  they  have valuable  experience  with  the  international constituencies or some  particular expertise that appliesA  subsidiary-level  board  of  directors presumably  governs  that  subsidiary  as  a  legal entity,  although  there  is  considerable  variation in local and legal requirements and how parent and subsidiary management choose to structure the roles, responsibility and use of such boards
  9. 9. Corporate  board  frequently  establish  various  specialized committees to fulfill certain specific duties such as auditing, selecting top management, monitoring conducts and ethics, and deciding executive compensation among others.Board  composition  (proportion  of  insider  vs.  outsider members).  Outside  directors  with  strong  network backgrounds  and  with  demanded  are  often  a  cost  effective solution.  At  the  corporate  level,  outside  directors  can contribute to the MNC by networking with global suppliers, buyers  and  distributors;  at  the  subsidiary  level,  outside directors  can  network  with  local  regulators,  politicians, competitors and other business community members.
  10. 10. C. Foreign Responsiveness and Corporate Governance Required adaptation or responsiveness toforeign market unique demands or marketconditions influences corporate governance andaccountability for several ways: 1. Increased local responsiveness requirements lead to higher information-processing costs 2. Subsidiary executives are essentially agents of the parent; this agency cost increases when required local responsiveness rises 3. Local responsiveness may increase the difficulty of maintaining accountability
  11. 11. Required local responsiveness may influence corporate-level board size. Higher required responsiveness is oftenassociated such MNCs that are:1. Pursuing market share and competitive power in host country2.  Establishing  presence  in  different  foreign  markets  and seeking transnational market power3.  Diversifying  and  financial  risk  by  investing  in  foreign countries4.  Exploring  production  factor  advantages  in  various  host countries5. Seizing pre emptive opportunities in  emerging market6. Enhancing learning in partnership with indigenous firms7. Improving host country-specific experience8.  Gaining  footholds  by  actively  participating  in  local environments
  12. 12. The I-R framework holds that required local responsiveness will be effectively fulfilled if an MNC has;    1)     superior abilities to reduce risk and manage uncertainties 2)       rich international experience  competency in local operations and the organizational expertise        needed for such operations1) interpersonal  and  inter-organizational  networking  abilities  with  local business communities.
  13. 13. Having a larger board, especially one with directors whohave international experience in managing risk anduncertainty and who have international marketknowledge can significantly help an MNC accommodatethe above needs without losing corporate governanceeffectiveness. Therefore, as required localresponsiveness increases, corporate level board size islikely to increase.
  14. 14. An  increased  need  for  local  responsiveness  may  escalate  the activity  and  independence  of  an  MNCs  subsidiary  boards  for several reasons. First, one of a subsidiary boards most active roles is  fostering  local  responsiveness. Krigers  survey  (1998)  identifies the  following  common  activities    in  achieving  this  goal:1.guiding and encouraging management in dealing with local legal conditions2.advising  management  on  local  country  developments.3.Appraising and reviewing local subsidiary operations.4.Helping subsidiary  management  anticipate  necessary  strategic  changes. reviewing  local  subsidiary  operations.4.Helping  subsidiary  management  anticipate  necessary  strategic changes.
  15. 15. Subsidiary boards should be active in approving budgets andshort terms strategies, monitoring operation performance,implementing corrective measures, participating in developingthe subsidiaries strategic plan and appraising and mitigating thepolitical and economic risk inherent to local projects.The number of outside directors at each subsidiary board is alsoexpected to increase when there is a stronger demand for localresponsiveness.Having outside directors who have network ties with strategicallyrelated firms can contribute to firm performance in an uncertainenvironment.
  16. 16. • Incentive-based discipline (IBD) exist when the parent firm employs financial and non- financial measures such as bonuses , shareholding, name recognition, merit adjustment, rewards, promotions and penalties from senior subsidiary managers to improve subsidiary transparency and accountability. The IBD system links these measures with:• 1.Quality of subsidiary reporting, including measurement principles, timeliness and credibility of disclosure.
  17. 17. • 2.Quality of information dissemination to headquarters and regional headquarters as well as corporate members located in other countries and regions• 3. Quality of information reporting concerning the off-the-balance sheet activities such as pooled investment schemes , insider trading activities, executives internal accounts, reinvoicing of intra-corporate transactions, transfer pricing practices, entertainment expenses for government officials and facilitation fees for new projects among others.
  18. 18. • IBD becomes particularly essential to this type of MNC for two reasons: first, process and bureaucratic controls, two commonly used control schemes are often difficult for every global MNC’s. process control requires direct personal surveillance and high levels of management direction and intervention. Second, using them is not realistic for financial , temporal or labor costs reason. This type of MNC cannot efficiently dispatch internal teams to each individual subsidiary abroad to conduct frequent , thorough and rigorous auditing.
  19. 19. Global competition and corporate governance• Rapid technological development, reduction of cross border trade and non-trade barriers, shortened industry life cycle, and increasingly sophisticated global consumption have considerably increased global competition. This occurs as: (i) rivals use the same competitive strategies or place emphasis on the same competitive advantage blocks, (ii) product, business and market portfolios become more similar as mnc’s globally
  20. 20. • Global competition influences corporate governance and accountability in several ways. First as global competition increases, corporate governance needs to foster a more stimulating environment that motivates senior executives to strive to excel at global competition.• Second, global competition increases the pressure to separate the CEO position from the board chairmanship, corporate transparency and accountability even more critical in the eye of shareholders, consumers, creditors, suppliers, and partners.
  21. 21. • Third when global competition is fierce, the mechanisms for monitoring the agency’s global organizing and decision making should be largely output-based, rather than behavior- based.• Finally, global competition provokes a greater need for the coordination of the MNC’s two- tiered governance system.• An MNC’s executive pay schemes are an important part of corporate governance.
  22. 22. • CEO, should be paid more than other executives who do not manage such complexity arising from global competition because the agent’s ability is a scarce and valuable resource. Corporate board may implement a ‘’long-term pay’’ schedule for the CEO to shape his or her commitment and behavior. Long-term pay for the CEO often works because it ameliorates the board’s burden of gathering information in the face of such geographic dispersion of sales, assets, capital, investments, and personnel.
  23. 23. • .• Long-term incentive plans encourage CEOs to monitor themselves, converge their interests with the principal’s interests, and streamline the implementation of long –haul business strategies for more effective global competition.
  24. 24. • The above logic applies to subsidiary executives as well.• Higher pay and greater long-term incentives offered to subsidiary executives should make it less likely for such executives to take personal advantage of the information asymmetry resulting from diversified global competition. Country managers have considerable control over local operations in competitive markets, their pay includes significantly greater performance incentives.
  25. 25. • Global competition may also reduce duality and inbreeding in the parent-level governance system. Duality is the situation in which the CEO is also the board chairperson. Inbreeding occurs when a retired CEO joins the board.• Global competition increases the duty burden for both the CEO and board chairperson positions.• Ceo is able to concentrate on designing and monitoring viable strategies for global competition while the chairperson concentrates on designing and monitoring
  26. 26. • Inbreeding, may hinder the appropriate governance needed for effective global competiton because it hampers the board’s ability to detect and correct governance problems such as fraud and illicit activities. Inbreeding also increases emotional dependence and attitudinal dependence of some board members on key executives.• Global competition increases, duality and inbreeding are likely to diminish.
  27. 27. International experience and corporate governance• Experience is a prime source of learning ; it leads to country-specific and/ or international knowledge that helps MNC’s to reduce transaction costs that arise during global expansion. Two types of experience are especially general international operations experience and country –specific experience.• t •