Corporate governance involves the systems and processes by which companies are directed and controlled. For multinational companies, corporate governance involves mechanisms at both the parent and subsidiary levels. Key corporate governance mechanisms for multinationals include ownership concentration, board composition and independence, executive compensation, and conduct codes. Effective corporate governance requires both market-based and culture-based approaches.

1. Chapter 1 - Corporate Governance in International
Business:
Concepts and Mechanisms
Corporate Governance = (OECD) is the system by which business
corporations are directed and control.
= specifies the distribution of rights and responsibilities among
different participants in the corporation, such as the board,
managers, shareholders and other stakeholder: spells out the
rules and procedures for making decisions on corporate affairs.
= requires developing internal processes and structures within a
firm to minimize agency costs between shareholders.
= structures serve to motivate managers to maximize firm value
instead of pursuing personal objectives and to ensure that
minority shareholders receive reliable information about the value
of the firm and the company’s managers and large shareholders
do not cheat them out of the value of their investment.

2. • Effective corporate governance is also
important to social welfare. A good
corporate governance however goes
beyond company standards and effort.
• In modern corporations like United States
and in United Kingdom a primary objective
of corporate governance is to ensure that
the interest of top level managers are
aligned with the interest of the
shareholders.

3. Agency Theory = implies that entrepreneurs,
shareholders, and managers should always find
ways to minimize the loss value that arises
from the separation of ownership
= is directed at the ubiquitous agency
relationship, in which one party (the principal)
delegates work to another (the agent), who
performs that work.

4. Two Main Problems that are Concerns by the
Agency Theory
1. The first is the agency problem that arises
when:
a. The desires or goals of the principal and agent
conflict
b. It is difficult or expensive for the principal to
verify that the agent has behave appropriately
2. Risk-sharing problem that arises when the
principal and agent have different attitudes
toward risk

5. Corporate Governance in Publicly Traded
MNCs generally contains related Tiers:
1. Parent-level corporate governance -
how the parent company’s rights, power
and responsibilities are divided and
monitored.
2. Subsidiary-level corporate governance
– how foreign subsidiaries that have their
own board of directors deal with their
shareholders and other local stakeholders
while simultaneously answering to and
integrating with the parent firm.

6. • Subsidiaries with their own board of
directors are either independently listed and
traded on foreign stock exchanges or they
are not listed on exchanges but meet either
a host country’s legal requirements or a
parent firm’s strategic consideration for
establishing such boards.
• Subsidiaries with their own board of
directors are generally not wholly owned
by the parent MNC.

7. First–tier governance influences the
second-tier through ownership holding,
operational coordination, corporate
support and performance monitoring.
Second-tier governance in turn channels
back to the first-tier through advice
provision, governance sharing, and
information reporting and directorate
expansion.

8. First tier governance
Parent level
•Ownership •Advising
holding agents
•Operational •Governance
coordination sharing
• Corporate •Information
support reporting
•Performance •Directorate
monitoring expansion
Second tier governance:
Subsidiary level

9. Corporate governance is not
synonymous with organizational
governance; it is just part of it.
Organizational governance comprises both
managerial governance and corporate
governance. Corporate governance involves
governance and control of affairs while
managerial governance emphasizes those
internal processes and structures that regulate
operational decisions and business activities
undertaken by an MNCs various subunits.

10. Managerial governance includes the
system that bring about internal adherence within
the corporation to a set of strategic goals
designed by top management through using
corporate power or authority. It is a more direct
intervention involving output monitoring,
bureaucratic monitoring and cultural monitoring.
Corporate governance that often uses
ownership concentration, board composition,
board leadership, and executive compensation.

11. Main Distinctions between MNCs and Domestic
Firms with Respect to Corporate Governance
1. MNCs must deal with more demanding
and more diverse global shareholders and
stakeholders
2. MNCs have more complex governance
structures that are subject to more
institutional and strategic constraints
3. MNCs have multi-tier or multi level
governance systems which jointly
constitute their overall corporate
governance framework

12. 4. MNCs must establish and execute a larger
number of governance mechanisms and
instruments to cope with globalizing needs and
cross-country differences in governance norms
5. MNCs must configure corporate governance
with a multitude of much more complicated
strategies, strategies and environments
6. MNCs face heterogeneous corporate
governance standards institutionalized by
different countries in which they invest and
operate

13. Mechanisms of Corporate Governance
1. Market-based governance mechanisms
includes
a. Ownership Concentration = defined by
the number of large-block shareholders as
well as by the proportion of share they
own. Continued cross-border investment
means that international institutional
investors become increasingly influential or
powerful in shaping board and shareholder
meetings.

14. b. Board Composition = proportion of “inside”
directors (executive directors) vs. “outside”
directors (non-executive directors), also has
strong implications on corporate because the
board is essentially the “guardian” of the
principal’s interest. Inside directors participate
in the decision processes and are able to access
inside information and can easily influenced by
the CEO in the decision making process. Outside
directors can be more effective boards and
profound evaluations of strategic decisions and
management behavior than inside directors.

15. In general, outside directors should be
competent, committed and have character.
* Competence includes experience and
expertise in both business and
management.
* Commitment is the availability to fulfill
important duties such as learning about the
business and company, preparing for
meetings and serving on committees.
* Character involves possessing a good
personality, vision, enthusiasm, moral
integrity, and interpersonal skills.

16. c. Market Discipline = it is an external
mechanisms, namely an open market for
corporate control, which becomes active when
a firms internal control fail, its performance is
poor, and /or its management is ineffective.
For example, poor market performance as well
as weak corporate governance of Peoples of
led to Oracles $9.2 billion hostile takeover bid
in 2004. a more globalized company is likely
to be watched by more companies around the
world.

17. Put alternatively, there will be more
potential buyers interested in taking over this
poor performing firm. Despite its poor
financial performance for years some
powerful companies from other countries
may initiate a hostile takeover to acquire the
company in trouble. Such takeover could be a
more cost effective way for foreign
companies to acquire some strategic assets of
other company in a target host country.

18. d. Board Chairmanship = involves whether
or not a firm’s CEO is also the board of
directors chairperson. The central role of
the chairperson is to monitor top
management behavior, this sort of CEO
“duality” is likely to seriously hinder
management accountability and may inhibit
the board’s ability to function properly as
an independent body. Agency theory
advocates the separation of these two
positions to protect shareholder.

19. Implications of Chairmanship in
International Expansion:
• As an MNC globalizes, a board
chairperson’s international
experience becomes more important
• As an MNC’s global operations
become significantly complex,
there will be a greater pressure the
MNC’s CEO from board
chairmanship

20. e. Board Size = Drawbacks when boards
are either too small or too large. Too
small implies a higher agency cost since
CEO is better able to influence board
meetings and decisions; the board also
suffers from a shortage of services and
expertise. When a board is too large,
despite having a bigger and more
diversified pool of expertise and
resources, it is also more likely to have
factions that increase group conflict.

21. f. Management Remuneration = can be
either behavior-based or outcome-based.
Behavior-based performance is a
governance mechanism that seeks to align the
interests of managers and owners through
salaries, bonuses, and long-term incentive
compensations such as stock awards and
option. Outcome-based compensation plans
that reward the agent’s performance instead of
action are preferred.

22. Agreed Compensation Standards Across
Countries:
• Executive remuneration should reflect
executive responsibilities
• Remuneration should be reasonable and
comparable with market standards
• Incentives schemes should be clearly
linked to performance benchmarks

23. Culture-based governance
• Market-based governance mechanisms are
necessary but instilling the right culture to
support corporate governance is essential.
Culture-based governance which comprises
(i)governance culture (ii) corporate
integrity, sets the moral tone for
governance and accountability.
• Governance culture refers to the
statements, visions, slogans, values, role
models and social rituals that are unique to,
and used by, an MNC board members and
key executive.

24. • Vision and commitment from key
executive and board members also play a
significant role in improving governance
and accountability.
• Ethical leadership sets moral standards for
the organization.
• Role models sets a positive ethical climate
because humans as social beings are
influence by the other humans and
generally strive to ‘fit in’.

25. • Governance and accountability also necessitate
corporate integrity which is concerned with the
disposition and behavior directed at realizing the
wholeness of the organization. Apart from a
formal structure to educate, detect and rectify
illicit behaviors, an organization may also
established committees to improved governance
and transparency; these committees can draft
codes of conduct and educate and train on
compliance procedures. Lastly, transparency
throughout an entire organization reduces the
opportunity for employees to engage in illicit
behaviors.

26. Discipline based governance
It comprises the following:
(i) executive penalty
(ii) internal auditing
(iii) conduct code
(iv) ethics program
first, executive compensation is not enough
to monitor and control agents action, it also
requires an executive penalty scheme.
Financial or non financial penalties for non
performance can be alternatives or
supplements to incentive schemes.

27. •Penalties may include base salary
reduction or freeze, bonus elimination,
fine payment, power downsizing and
most harshly total dismissal. With such
penalties in place, agents are less likely
to gamble with the firms assets. Thus,
penalties can help better align the
interest of shareholders and management

28. • Independent auditing of corporate affairs is
a prerequisite for discipline-based
governance: internal and external
independent auditing can identify misconduct
that can be penalized. External auditors
should be appointed not by the management
but by shareholders in their general meeting.
The auditing committee should monitor the
integrity of the financial statements, review
significant financial reporting judgments and
attempt to identify any misconduct beyond
financial statements.

29. • Conduct codes make expectations about
legal and ethical behavior clear, increase the
likelihood of detection, assure the
punishments of transgressions, reward desire
behaviors and discipline those who engage in
illegal behavior.
• Codes may contain general precepts,
mandate specific practices, provide clearly
stated provisions to address legalities, deal
with ethical concerns and stipulate methods
of investigation.

30. • Lastly, ethics program are organizational
control systems that encourage shared ethical
goals and rule compliance. It is important not to
delegate too much discretionary authority
offshore executive in case they are prone to
engaging in misconduct. For a reporting
mechanism to be effective it should be
accompanied by adequate policies on
confidentially and non realization in order to
foster open communication when ordinary
channels fail.