This document discusses how corporate governance is influenced by global operations and increased complexity for multinational corporations. As MNCs expand globally, they face greater complexity due to geographic dispersion, dependence on foreign markets, and diverse regulatory environments. Effective corporate governance requires transparency and accountability through information reporting. The scale of globalization and need for local responsiveness in foreign markets also influences corporate governance needs, such as larger boards with international experience and more independent subsidiary boards. Incentive-based measures can help improve transparency and accountability of foreign subsidiaries.

1. Chapter 3 – Corporate Governance in Global
Operations: Design and Actions
A. 1. Global operations influence corporate governance
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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. 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. 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. 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. • 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. Information-processing theory maintains
that organizations will be more effective when
there is harmony between their information-
processing requirements and their information-
processing capacity
Information-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. 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. 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 applies
A 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. 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. C. Foreign Responsiveness and Corporate
Governance
Required adaptation or responsiveness to
foreign market unique demands or market
conditions influences corporate governance and
accountability 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. Required local responsiveness may influence
corporate-level board size. Higher required
responsiveness is often associated such MNCs that
are:
1.Pursuing market share and competitive power in host country
2.Establishing presence in different foreign markets and seeking
transnational market power
3. Diversifying and financial risk by investing in foreign countries
4. Exploring production factor advantages in various host
countries
5. Seizing pre emptive opportunities in emerging market
6. Enhancing learning in partnership with indigenous firms
7. Improving host country-specific experience
8. Gaining footholds by actively participating in local
environments

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
3) competency in local operations and the organizational
expertise needed for such operations
4) interpersonal and inter-organizational networking abilities
with local business communities.

13. Having a larger board, especially one with
directors who have international experience
in managing risk and uncertainty and who
have international market knowledge can
significantly help an MNC accommodate the
above needs without losing corporate
governance effectiveness. Therefore, as
required local responsiveness increases,
corporate level board size is likely to increase.

14. An increased need for local responsiveness may escalate
the activity and independence of an MNC's 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 conditions
2.advising management on local country developments
3.Appraising and reviewing local subsidiary operations.4
4.Helping subsidiary management anticipate necessary
strategic changes. reviewing local subsidiary operations.

15. Subsidiary boards should be active in approving budgets
and short terms strategies, monitoring operation
performance, implementing corrective measures,
participating in developing the subsidiaries strategic
plan and appraising and mitigating the political and
economic risk inherent to local projects.
The number of outside directors at each subsidiary
board is also expected to increase when there is a
stronger demand for local responsiveness.
Having outside directors who have network ties with
strategically related firms can contribute to firm
performance in an uncertain environment.

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. 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. 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. 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 compete in similar
business lines.

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. 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. • 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. • 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. • 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. 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 corporate governance.

26. Inbreeding, may hinder the appropriate
governance needed for effective global
competition 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. 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.
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