Corporate gernance chapter 4

Multilevel Corporate Governance in MNCs
Chapter 4
• In the second case (when a subsidiary is not listed on
Corporate Governance at Multilevel: The a local exchange but has its own board to meet a
Parent- Subsidiary Link host country’s legal requirement), subsidiary boards
are often established in foreign-local equity joint
ventures that are legally registered as independent
companies in a host country.
• In the third case (when a subsidiary board is
established to meet a parent firm’s strategic
considerations), subsidiary boards play an important
part in an MNCs global coordination, accountability,
and governance.


Mu lt ilevel Corp orat e
• Japanese MNCs illustrate some specific roles played by
Govern an ce in MNCs subsidiary boards to meet their parents’ strategic
considerations. Their subsidiary boards are generally
designed to;
1. approve budgets and short- term plans of the subsidiary
2. monitor operating performance and corrective measures
in the subsidiary
3. participate in drawing up the subsidiary’s strategic plans
4. ensure compliance with local legal requirements
Multilevel Corporate Governance in MNCs 5. provide knowledge of local social, economic, and
political conditions and
6. appraise and attempt to minimize the subsidiary’s political
risk.
Defining multilevel corporate governance
• Subsidiaries with their own board of directors are
either independently listed on local stock
exchanges or they are not listed on exchanges but
do either meet a host country’s legal requirements
or a parent firms strategic considerations for
establishing such boards. Multilevel Corporate Governance in MNCs
• This subsidiary-level board of directors governs the
subsidiary as a legal entity although there is
considerable variation in local and legal • These roles are a combination of environmental
sensing, decision-making, advising, and monitoring
requirements as well as how parent and subsidiary roles.
choose to structure the role, responsibility and use • Kriger (1988) offers some interesting survey results
of such boards. showing some advantages as perceived by MNC
executive. When they are asked “what do you see
as the advantages or disadvantages of having a
subsidiary with an active board?” Japanese MNCs
replied:
1. An activated board can give more concrete
instructions to officers concerning both responsibility
and management.
Multilevel Corporate Governance in MNCs 2. A member of a board, who obtains a fair
knowledge of the present situation of the
company, can perform the function of a sincere
advising agent.
• In the first case (when a subsidiary is listed on a host
country’s stock exchange), the corporate
governance structure in this subsidiary is not much
different from the governance structure in host
country corporations traded in local stock
exchanges.
• To exercise its power and monitor the subsidiary’s
governance and performance, the MNC parent
generally has three channels or means often used
simultaneously to fulfill the goals:(1) having its own 3. An activated board can encourage officers to
directors on the board; (2) controlling the nomination have a greater interest in the corporation and a
and appointment of key personnel and (3) strong sense of responsibility.
implementing codes of conducts, ethical standards,
and transparency practices set by the parent. • Swedish MNCs responded that an active subsidiary
board can;
1. Present an independent view on how the
subsidiary’s business should be conducted with the
goal of making the subsidiary both a business
success and a good corporate citizen in its host
nation.
2. Counsel the subsidiary’s management on its
relations with personnel, financial institutions,
government bodies, and the public.

Multilevel Corporate Governance in MNCs Multilevel Corporate Governance in MNCs

3. Periodically appraise the performance of the • To do a good job, local board members must also have the
subsidiary’s management, primarily through review full confidence of top executives.
of its financial reports and statements.
• Second, parent board and subsidiary management are
4. Counsel the company regarding local
linked despite the very weak magnitude and infrequent
compensation standards
manner.

• Japanese MNCs appeared to have a strong desire • Third, parent management board and subsidiary board
to dig “deep roots” into the host countries in which whose ties are stronger than those between parent board
they operate whereas North American MNCs were and subsidiary level board and management are linked
less likely to view a particular host country as together via joint monitoring.
requiring such “deep roots”.


Understanding multilevel skills

First tier governance influences the second tier Corp orat e Govern an ce an d
governance through ownership holding, Su bsid iary Roles
organizational coordination, corporate support
and performance monitoring.

Corporate Governance and Subsidiary Roles

Subsidiary roles and Governance design
Subsidiary roles are categorized in different ways:
• FIRST, in Jarillo and Martinez’s scheme, the two basic dimension
• Second tier governance in turn channels back to the first underlying strategic choices are the:
tier through advice provision, governance sharing, a. Geographic localization of activities.
information reporting and directorate expansion. b. The degree of integration of those activities with the same
activities in other subsidiaries of the firm.
• Parent board is often the utmost or final authority to A subsidiary that performs most activities in other
approve large investments oversea. activities chain has two different options:
a. Autonomous from headquarters
• In corporate governance the shareholders have the last b. Integrated with headquarters
word.


Multilevel Corporate Governance in MNCs • Accordingly, corporate governance should cope with three
identities:
a. Autonomous subsidiary
• To do a good job, local board members must also have the b. Receptive subsidiary
full confidence of top executives. c. Active subsidiary

• Second, parent board and subsidiary management are • Second classification scheme of subsidiary roles is Gupta and
linked despite the very weak magnitude and infrequent Gorindarajan’s approach that focuses on knowledge/resources flow
manner. patterns. Intra-corporate knowledge flow is defined as the transfer
of either expertise or external market data of strategic value.
• Third, parent management board and subsidiary board
whose ties are stronger than those between parent board
and subsidiary level board and management are linked
together via joint monitoring.

Corporate Governance and Subsidiary Roles Corporate Governance and Subsidiary Roles

• Transnational strategy: A transnational strategy is a corporate strategy
Two dimensions involving knowledge flow that is: that seeks to achieve both global efficiency and local responsiveness.
a. the extent to which the subsidiary receives knowledge inflow Realizing the diverse goals of the transnational strategy is difficult
from the rest of the corporation because one goal requires close global coordination, while the other
b. the extent to which the subsidiary receives knowledge requires local flexibility.
outflow from the rest of the corporation.
As a result, four generic subsidiary roles can be defined:  The three global integration strategies have implications on the design
of the global corporate governance as well. As the global integrations
a. Global innovator role strategy moves from the global to transnational and then to multi
b. Integrated player role domestic, subsidiary board is becoming more important for an MNC’s
c. implementer role global corporate governance because required local responsiveness
d. Local innovator heightens with this shift.


• The third scheme is made by Barlett and Ghoshal. There are four
categories:
a. Strategic leader
b. Contributor subsidiaries
c. Implementer subsidiaries Man ag erial Govern an ce in
d. Black hole subsidiaries Global Bu sin ess

 The Final scheme is Poynter and White’s classification. The underlying
factors affecting subsidiary’s strategic roles include organization slack,
the local environment, the values of key implementers, and
organizational relationships affecting both the development and
execution of strategy.

Managerial Governance in Global Business

• Managerial governance and corporate governance together comprise
total governance or organizational governance.
• Corporate governance involves governance and control of corporate
affairs. And often uses ownership concentration, board composition,
board leadership, and executive compensation.
In light of above factors, a subsidiary can be defined as one of five
types:
• While managerial governance emphasizes those internal processes
a. Miniature replica
and structures that regulate operational decisions and business
b. Marketing satellite
activities undertaken by an MNC’s various subunits.
c. Rationalized manufacturer
d. Strategic independent.


- Includes the systems that bring about internal adherence within
Corporate Governance and Subsidiary Roles the corporation to a set of strategic goals designed by top
management through using corporate power or authority.
Corporate strategies and governance design
- Is a more direct intervention involving output monitoring,
• Multi domestic strategy: A multi domestic strategy is one in bureaucratic monitoring, and cultural monitoring.
which strategic and operating decisions are decentralized to the
strategic business unit in each country in order to tailor products
to the local market. A multi domestic strategy focuses on - Directly impacts corporate transparency, accountability, and
competition within each country. ethics, which in turn determine the effectiveness of corporate
governance.
• Global strategy: A global strategy assumes more standardization
of products across country markets. As a result, the competitive
strategy is centrally controlled by the home office. The strategic
business units operating in each country are assumed to be
interdependent.

Managerial Governance in Global Business Managerial Governance in Global Business
 Coordination’s contribution to global managerial governance has two
- Includes the systems that bring about internal adherence within dimensions:
the corporation to a set of strategic goals designed by top
management through using corporate power or authority. 1. Breadth of coordination - refers to the number of other units with
which a subsidiary coordinates.
- Is a more direct intervention involving output monitoring, 2. Diversity of coordination – the number of functions coordinated.
bureaucratic monitoring, and cultural monitoring.
 The process of coordination requires mechanisms which can be divided
roughly into two groups:
- Directly impacts corporate transparency, accountability, and
ethics, which in turn determine the effectiveness of corporate 1. Formal Group – contains four mechanisms comprising centralization,
governance. formalization, planning, and behavioral control
2. Subtle Group – includes three kinds of managerial mechanisms, namely
lateral relations, informal communication, and organizational culture.

- Nurtures corporate governance by providing an improved
organizational platform to perform internal control, information  MNCs are increasingly using strategic orientation in lieu of
disclosure and financial or non-financial auditing and to bolster conventional controls to monitor the operation of foreign subsidiaries
corporate integrity and ethical practices. and to perform managerial governance.

- Is more relevant in the global setting.  Strategic orientation is an efficient mid-range instrument linking
global integration with local responsiveness. Compared to control and
- Is manifested in control, coordination, and orientation. coordination, strategic orientation arrangement is the least direct,
least costly, and has the longest or most sustained effect.

• Control is seen as the process which brings about adherence to a goal
through the exercise of power or authority. Coordination is seen as
more of an enabling process which provides the appropriate linkage  Managerial Control is further composed of output control, bureaucratic
between different task units within the organization. control, and cultural control.

• Coordination is associated with integrating activities dispersed across  Output controls require very little managerial direction and
subsidiaries. Control is a more direct intervention into the operations intervention, and hence they are likely to result in attempts to influence
of subsidiaries. how individual activities are performed.
 Bureaucratic control is extensively employed by MNCs. It consists of a
• Coordination is distinguished not by direct intervention but by limited and explicit set of codified rules and regulations which delineate
situating the subsidiary in a network of responsibilities.
desired performance in terms of output and/or behavior.
• Compared to control, coordination is less direct, less costly, and has a  A number of organizational practices facilitate the existence of a
longer time span. cultural control system. The use of a cultural control system has several
implications for selection, training, and monitoring of organizational
members.


Tools of Managerial Governance
 MNC parents are often unable to use centralized decision-making
process to maintain global managerial governance and control for 1. Information Systems
several reasons. » Data Management and Information System
tools can be used to control the following:
1. The diversity of countries in which the firm operates, the differences § the kinds of information gathered systematically by
in the extent of integration across functions, and the firm’s evolving members of the organization;
product diversification. § how such information is aggregated, analyzed, and
given a meaning;
2. Maintain the proper global integration-local responsiveness (I-R) § how, in which form, and to whom it circulates;
balance is an ongoing process which requires occasional § how it is used in major decision
reassessment.
» Management tools ensure that relevant differentiated
information will be brought to bear on decisions.
3. There may be no single vantage point within the firm from which to
consider all of its needs.


2. Managerial Mechanisms 6. Entry Mode selection

» Planning processes can catalyze the strategic » A fundamental investment strategy which affects the
convergence and consensus building among MNC’s ability to control local operations and
executives whose initial perceptions and priorities integrate these businesses into global network
may differ widely. during subsequent operational stages.

» Conflict Resolution- provides the necessary
channels for confronting perceived needs for
integration and responsiveness.


3. Human Resource Administration 7. Global Business Structures

» Market tools include more typical human resource » Global Product Group Structure– a product group
management components such as shaping headquarters is created coordinate the activities of
careers, reward and punishment systems and the domestic and foreign divisions within the
management development. product group.

» The main failing of the global product group
structure is that while it allows a company to
achieve superior efficiency and quality, it is weak
when it comes to customer responsiveness.

4. Communication Systems
8. Corporate Culture
» Frequency, informality, openness and density of
communications between a focal subsidiary and » Statements, visions, customs, slogans, values,
the rest of the corporation should be higher for role models, and social rituals that are unique to,
those subunits which play a greater pat in global and used by, a focal organization to resist
integration. corruption practices.

» Informal Interactions- process through which » Anti-corruption statement
subsidiary managers’ values and norms become
aligned with those of the parent corporation. » Vision and commitments from leadership play a
significant role in enhancing managerial
governance for global operations.

5. Expatriate Dispatching
9. Ethics Program
» The ratio of expatriates as a percentage of the top
» This control makes information and expectations
management team should be higher for those about legal and ethical behaviors clear, increases
subsidiaries which play a bigger role in the MNC’s the likelihood of detection, assures the
global integration. punishments of transgressions, rewards desired
behaviors and disciplines who engage in illegal
behavior.

» Motivating employees to behave legally and
ethically can be prompted by the incorporation of
ethics into selection, performance appraisal,
discipline and job analysis procedures.

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