chap. 4 corp. gov. at multilevel

Chapter 4Chapter 4

Corporate Governance at Multilevel: Corporate Governance at Multilevel: The Parent- Subsidiary LinkThe Parent- Subsidiary Link

Multilevel Corporate Multilevel Corporate Governance in MNCsGovernance in MNCs

Multilevel Corporate Governance in MNCsMultilevel Corporate Governance in MNCs

Defining multilevel corporate governanceDefining multilevel corporate governance

Subsidiaries with their own board of directors are Subsidiaries with their own board of directors are either independently listed on local stock exchanges either independently listed on local stock exchanges or they are not listed on exchanges but do either or they are not listed on exchanges but do either meet a host country’s legal requirements or a meet a host country’s legal requirements or a parent firms strategic considerations for parent firms strategic considerations for establishing such boards.establishing such boards.

This subsidiary-level board of directors governs the This subsidiary-level board of directors governs the subsidiary as a legal entity although there is subsidiary as a legal entity although there is considerable variation in local and legal considerable variation in local and legal requirements as well as how parent and subsidiary requirements as well as how parent and subsidiary choose to structure the role, responsibility and use choose to structure the role, responsibility and use of such boards.of such boards.


In In the first casethe first case (when a subsidiary is listed on a host (when a subsidiary is listed on a host country’s stock exchange), the corporate governance country’s stock exchange), the corporate governance structure in this subsidiary is not much different from structure in this subsidiary is not much different from the governance structure in host country the governance structure in host country corporations traded in local stock exchanges.corporations traded in local stock exchanges.

To exercise its power and monitor the subsidiary’s To exercise its power and monitor the subsidiary’s governance and performance, the MNC parent governance and performance, the MNC parent generally has three channels or means often used generally has three channels or means often used simultaneously to fulfill the goals:(1) having its own simultaneously to fulfill the goals:(1) having its own directors on the board; (2) controlling the nomination directors on the board; (2) controlling the nomination and appointment of key personnel and (3) and appointment of key personnel and (3) implementing codes of conducts, ethical standards, implementing codes of conducts, ethical standards, and transparency practices set by the parent.and transparency practices set by the parent.


In In the second casethe second case (when a subsidiary is not listed (when a subsidiary is not listed on a local exchange but has its own board to meet on a local exchange but has its own board to meet a host country’s legal requirement), subsidiary a host country’s legal requirement), subsidiary boards are often established in foreign-local equity boards are often established in foreign-local equity joint ventures that are legally registered as joint ventures that are legally registered as independent companies in a host country.independent companies in a host country.

In In the third casethe third case (when a subsidiary board is (when a subsidiary board is established to meet a parent firm’s strategic established to meet a parent firm’s strategic considerations), subsidiary boards play an considerations), subsidiary boards play an important part in an MNCs global coordination, important part in an MNCs global coordination, accountability, and governanceaccountability, and governance..


Japanese MNCs illustrate some specific roles played by Japanese MNCs illustrate some specific roles played by subsidiary boards to meet their parents’ strategic subsidiary boards to meet their parents’ strategic considerations. Their subsidiary boards are generally considerations. Their subsidiary boards are generally designed to;designed to;

1. approve budgets and short- term plans of the subsidiary1. approve budgets and short- term plans of the subsidiary2. monitor operating performance and corrective measures 2. monitor operating performance and corrective measures

in the subsidiaryin the subsidiary3. participate in drawing up the subsidiary’s strategic plans3. participate in drawing up the subsidiary’s strategic plans4. ensure compliance with local legal requirements4. ensure compliance with local legal requirements5. provide knowledge of local social, economic, and 5. provide knowledge of local social, economic, and

political conditions and political conditions and 6. appraise and attempt to minimize the subsidiary’s 6. appraise and attempt to minimize the subsidiary’s

political risk.political risk.


These roles are a combination of environmental These roles are a combination of environmental sensing, decision-making, advising, and monitoring sensing, decision-making, advising, and monitoring roles.roles.

Kriger (1988) offers some interesting survey results Kriger (1988) offers some interesting survey results showing some advantages as perceived by MNC showing some advantages as perceived by MNC executive. When they are asked “executive. When they are asked “what do you see what do you see as the advantages or disadvantages of having a as the advantages or disadvantages of having a subsidiary with an active board?” subsidiary with an active board?” Japanese MNCs Japanese MNCs replied:replied:

1.1. An activated board can give more concrete An activated board can give more concrete instructions to officers concerning both instructions to officers concerning both responsibility and management.responsibility and management.

2.2. A member of a board, who obtains a fair knowledge A member of a board, who obtains a fair knowledge of the present situation of the company, can of the present situation of the company, can perform the function of a sincere advising agent.perform the function of a sincere advising agent.


3.3. An activated board can encourage officers to have a An activated board can encourage officers to have a greater interest in the corporation and a strong sense greater interest in the corporation and a strong sense of responsibility.of responsibility.

Swedish MNCs responded that an active subsidiary Swedish MNCs responded that an active subsidiary board can;board can;

1.1. Present an independent view on how the subsidiary’s Present an independent view on how the subsidiary’s business should be conducted with the goal of business should be conducted with the goal of making the subsidiary both a business success and a making the subsidiary both a business success and a good corporate citizen in its host nation.good corporate citizen in its host nation.

2.2. Counsel the subsidiary’s management on its relations Counsel the subsidiary’s management on its relations with personnel, financial institutions, government with personnel, financial institutions, government bodies, and the public.bodies, and the public.


3.3. Periodically appraise the performance of the Periodically appraise the performance of the subsidiary’s management, primarily through subsidiary’s management, primarily through review of its financial reports and statements.review of its financial reports and statements.

4.4. Counsel the company regarding local Counsel the company regarding local compensation standardscompensation standards

Japanese MNCs appeared to have a strong desire Japanese MNCs appeared to have a strong desire to dig “deep roots” into the host countries in to dig “deep roots” into the host countries in which they operate whereas North American which they operate whereas North American MNCs were less likely to view a particular host MNCs were less likely to view a particular host country as requiring such “deep roots”.country as requiring such “deep roots”.


Understanding multilevel skillsUnderstanding multilevel skills

First tier governance influences the First tier governance influences the second tier governance through second tier governance through

ownership holding, organizational ownership holding, organizational coordination, corporate support and coordination, corporate support and

performance monitoring.performance monitoring.


Second tier governance in turn channels back Second tier governance in turn channels back to the first tier through advice provision, to the first tier through advice provision, governance sharing, information reporting and governance sharing, information reporting and directorate expansion.directorate expansion.

Parent board is often the utmost or final Parent board is often the utmost or final authority to approve large investments authority to approve large investments oversea.oversea.

In corporate governance the shareholders In corporate governance the shareholders have the last word.have the last word.


To do a good job, local board members must To do a good job, local board members must also have the full confidence of top executives.also have the full confidence of top executives.

Second, parent board and subsidiary Second, parent board and subsidiary management are linked despite the very weak management are linked despite the very weak magnitude and infrequent manner.magnitude and infrequent manner.

Third, parent management board and Third, parent management board and subsidiary board whose ties are stronger than subsidiary board whose ties are stronger than those between parent board and subsidiary those between parent board and subsidiary level board and management are linked level board and management are linked together via joint monitoring.together via joint monitoring.


Finally, the relationship between parent Finally, the relationship between parent management and subsidiary management management and subsidiary management which is obviously stronger than all other links.which is obviously stronger than all other links.

To foster corporate governance :To foster corporate governance :

strengthen transparency, coordinate interest and strengthen transparency, coordinate interest and implement conduct codes.implement conduct codes.

Corporate Governance and Corporate Governance and Subsidiary RolesSubsidiary Roles

Corporate Governance and Subsidiary Corporate Governance and Subsidiary RolesRoles

Subsidiary roles and Governance designSubsidiary roles and Governance design

Subsidiary roles are categorized in different ways:Subsidiary roles are categorized in different ways:

FIRST, in FIRST, in Jarillo and Martinez’s schemeJarillo and Martinez’s scheme, the two , the two basic dimension underlying strategic choices are basic dimension underlying strategic choices are the:the:

a. Geographic localization of activities.a. Geographic localization of activities. b. The degree of integration of those activities with b. The degree of integration of those activities with

the same activities in other subsidiaries of the the same activities in other subsidiaries of the firm.firm.A subsidiary that performs most activities in other A subsidiary that performs most activities in other activities chain has two different options:activities chain has two different options: a. Autonomous from headquartersa. Autonomous from headquarters b. Integrated with headquartersb. Integrated with headquarters


Accordingly, corporate governance should cope with Accordingly, corporate governance should cope with three identities:three identities:a. Autonomous subsidiarya. Autonomous subsidiaryb. Receptive subsidiaryb. Receptive subsidiaryc. Active subsidiaryc. Active subsidiary

Second classification scheme of subsidiary roles is Second classification scheme of subsidiary roles is Gupta and Gorindarajan’s approach Gupta and Gorindarajan’s approach that focuses that focuses on knowledge/resources flow patterns. Intra-corporate on knowledge/resources flow patterns. Intra-corporate knowledge flow is defined as the transfer of either knowledge flow is defined as the transfer of either expertise or external market data of strategic value.expertise or external market data of strategic value.


Two dimensions involving knowledge flow that is:Two dimensions involving knowledge flow that is:a. the extent to which the subsidiary receives a. the extent to which the subsidiary receives

knowledge inflow from the rest of the corporationknowledge inflow from the rest of the corporationb. the extent to which the subsidiary receives b. the extent to which the subsidiary receives

knowledge outflow from the rest of the corporation.knowledge outflow from the rest of the corporation.

As a result, four generic subsidiary roles can be As a result, four generic subsidiary roles can be defined:defined:

a. Global innovator rolea. Global innovator roleb. Integrated player roleb. Integrated player rolec. implementer rolec. implementer roled. Local innovatord. Local innovator


The third scheme is made by The third scheme is made by Barlett and GhoshalBarlett and Ghoshal. There are . There are four categories:four categories:

a. Strategic leadera. Strategic leader

b. Contributor subsidiariesb. Contributor subsidiaries

c. Implementer subsidiariesc. Implementer subsidiaries

d. Black hole subsidiariesd. Black hole subsidiaries

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


In light of above factors, a subsidiary can be defined as In light of above factors, a subsidiary can be defined as one of five types:one of five types:

a. Miniature replicaa. Miniature replicab. Marketing satelliteb. Marketing satellitec. Rationalized manufacturerc. Rationalized manufacturerd. Strategic independent.d. Strategic independent.


Corporate strategies and governance designCorporate strategies and governance design

Multi domestic strategy: Multi domestic strategy: A multi domestic strategy is A multi domestic strategy is one in which strategic and operating decisions are one in which strategic and operating decisions are decentralized to the strategic business unit in each decentralized to the strategic business unit in each country in order to tailor products to the local market. A country in order to tailor products to the local market. A multi domestic strategy focuses on competition within multi domestic strategy focuses on competition within each country.each country.

Global strategy: Global strategy: A global strategy assumes more A global strategy assumes more standardization of products across country markets. As a standardization of products across country markets. As a result, the competitive strategy is centrally controlled by result, the competitive strategy is centrally controlled by the home office. The strategic business units operating in the home office. The strategic business units operating in each country are assumed to be interdependent.each country are assumed to be interdependent.


Transnational strategy: Transnational strategy: A transnational strategy is a A transnational strategy is a corporate strategy that seeks to achieve both global corporate strategy that seeks to achieve both global efficiency and local responsiveness. Realizing the diverse efficiency and local responsiveness. Realizing the diverse goals of the transnational strategy is difficult because goals of the transnational strategy is difficult because one goal requires close global coordination, while the one goal requires close global coordination, while the other requires local flexibility.other requires local flexibility.

The three global integration strategies have implications The three global integration strategies have implications

on the design of the global corporate governance as on the design of the global corporate governance as well. As the global integrations strategy moves from the well. As the global integrations strategy moves from the global to transnational and then to multi domestic, global to transnational and then to multi domestic, subsidiary board is becoming more important for an subsidiary board is becoming more important for an MNC’s global corporate governance because required MNC’s global corporate governance because required local responsiveness heightens with this shift.local responsiveness heightens with this shift.

Managerial Governance in Managerial Governance in Global BusinessGlobal Business

Managerial Governance in Global Managerial Governance in Global BusinessBusiness

Managerial governance and corporate governance together Managerial governance and corporate governance together comprise total governance or organizational governance.comprise total governance or organizational governance.

Corporate governanceCorporate governance involves governance and control involves governance and control of corporate affairs. And often uses ownership of corporate affairs. And often uses ownership concentration, board composition, board leadership, and concentration, board composition, board leadership, and executive compensation.executive compensation.

While While managerial governancemanagerial governance emphasizes those emphasizes those internal processes and structures that regulate operational internal processes and structures that regulate operational decisions and business activities undertaken by an MNC’s decisions and business activities undertaken by an MNC’s various subunits.various subunits.


- Includes the systems that bring about internal - Includes the systems that bring about internal adherence within the corporation to a set of strategic adherence within the corporation to a set of strategic goals designed by top management through using goals designed by top management through using corporate power or authority.corporate power or authority.

- Is a more direct intervention involving output - Is a more direct intervention involving output monitoring, bureaucratic monitoring, and cultural monitoring, bureaucratic monitoring, and cultural monitoring.monitoring.

- Directly impacts corporate transparency, - Directly impacts corporate transparency, accountability, and ethics, which in turn determine the accountability, and ethics, which in turn determine the effectiveness of corporate governance.effectiveness of corporate governance.


- Nurtures corporate governance by providing an - Nurtures corporate governance by providing an improved organizational platform to perform internal improved organizational platform to perform internal control, information disclosure and financial or non-control, information disclosure and financial or non-financial auditing and to bolster corporate integrity financial auditing and to bolster corporate integrity and ethical practices.and ethical practices.

- Is more relevant in the global setting.- Is more relevant in the global setting.

- Is manifested in control, coordination, and - Is manifested in control, coordination, and orientation. orientation.


ControlControl is seen as the process which brings about is seen as the process which brings about adherence to a goal through the exercise of power or adherence to a goal through the exercise of power or authority. authority. CoordinationCoordination is seen as more of an enabling is seen as more of an enabling process which provides the appropriate linkage between process which provides the appropriate linkage between different task units within the organization.different task units within the organization.

CoordinationCoordination is associated with integrating activities is associated with integrating activities dispersed across subsidiaries. dispersed across subsidiaries. ControlControl is a more direct is a more direct intervention into the operations of subsidiaries.intervention into the operations of subsidiaries.

CoordinationCoordination is distinguished not by direct intervention but is distinguished not by direct intervention but by situating the subsidiary in a network of responsibilities.by situating the subsidiary in a network of responsibilities.

Compared to control, Compared to control, coordinationcoordination is less direct, less costly, is less direct, less costly, and has a longer time span.and has a longer time span.


MNC parents are often unable to use centralized decision-MNC parents are often unable to use centralized decision-making process to maintain global managerial governance making process to maintain global managerial governance and control for several reasons.and control for several reasons.

1.1. The diversity of countries in which the firm operates, the The diversity of countries in which the firm operates, the differences in the extent of integration across functions, differences in the extent of integration across functions, and the firm’s evolving product diversification.and the firm’s evolving product diversification.

2.2. Maintain the proper global integration-local responsiveness Maintain the proper global integration-local responsiveness (I-R) balance is an ongoing process which requires (I-R) balance is an ongoing process which requires occasional reassessment.occasional reassessment.

3.3. There may be no single vantage point within the firm from There may be no single vantage point within the firm from which to consider all of its needs.which to consider all of its needs.


Coordination’s contribution to global managerial governance has Coordination’s contribution to global managerial governance has two dimensions: two dimensions:

1.1. Breadth of coordination Breadth of coordination - refers to the number of other units - refers to the number of other units with which a subsidiary coordinates.with which a subsidiary coordinates.

2.2. Diversity of coordination Diversity of coordination – the number of functions – the number of functions coordinated.coordinated.

The process of coordination requires mechanisms which can be The process of coordination requires mechanisms which can be divided roughly into two groups:divided roughly into two groups:

1.1. Formal GroupFormal Group – contains four mechanisms comprising – contains four mechanisms comprising centralization, formalization, planning, and behavioral controlcentralization, formalization, planning, and behavioral control

2.2. Subtle GroupSubtle Group – includes three kinds of managerial mechanisms, – includes three kinds of managerial mechanisms, namely lateral relations, informal communication, and namely lateral relations, informal communication, and organizational culture.organizational culture.


MNCs are increasingly using strategic orientation in lieu MNCs are increasingly using strategic orientation in lieu of conventional controls to monitor the operation of of conventional controls to monitor the operation of foreign subsidiaries and to perform managerial foreign subsidiaries and to perform managerial governance.governance.

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


Managerial ControlManagerial Control is further composed of output control, is further composed of output control, bureaucratic control, and cultural control.bureaucratic control, and cultural control.

Output controlsOutput controls require very little managerial direction and require very little managerial direction and intervention, and hence they are likely to result in attempts intervention, and hence they are likely to result in attempts to influence how individual activities are performed.to influence how individual activities are performed.

Bureaucratic controlBureaucratic control is extensively employed by MNCs. It is extensively employed by MNCs. It consists of a limited and explicit set of codified rules and consists of a limited and explicit set of codified rules and regulations which delineate desired performance in terms of regulations which delineate desired performance in terms of output and/or behavior.output and/or behavior.

A number of organizational practices facilitate the existence A number of organizational practices facilitate the existence of a of a cultural control systemcultural control system. The use of a cultural control . The use of a cultural control system has several implications for selection, training, and system has several implications for selection, training, and monitoring of organizational members.monitoring of organizational members.


Tools of Managerial GovernanceTools of Managerial Governance1.1. Information SystemsInformation Systems

» Data Management and Information System Data Management and Information System tools can be used to control the following:tools can be used to control the following:

§ the kinds of information gathered systematically by the kinds of information gathered systematically by members of the organization;members of the organization;

§ how such information is aggregated, analyzed, and how such information is aggregated, analyzed, and given a meaning;given a meaning;

§ how, in which form, and to whom it circulates;how, in which form, and to whom it circulates;§ how it is used in major decisionhow it is used in major decision

» Management tools ensure that relevant differentiated information will be brought to bear on decisions.


» Planning processes can catalyze the strategic Planning processes can catalyze the strategic convergence and consensus building among convergence and consensus building among executives whose initial perceptions and executives whose initial perceptions and priorities may differ widely.priorities may differ widely.

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

2. Managerial Mechanisms


» Market tools include more typical human Market tools include more typical human resource management components such as resource management components such as shaping careers, reward and punishment shaping careers, reward and punishment systems and management development.systems and management development.

3. Human Resource Administration


» Frequency, informality, openness and density of Frequency, informality, openness and density of communications between a focal subsidiary and communications between a focal subsidiary and the rest of the corporation should be higher for the rest of the corporation should be higher for those subunits which play a greater pat in those subunits which play a greater pat in global integration. global integration.

» Informal Interactions- process through which Informal Interactions- process through which subsidiary managers’ values and norms subsidiary managers’ values and norms become aligned with those of the parent become aligned with those of the parent corporation.corporation.

4. Communication Systems


» The ratio of expatriates as a percentage of the The ratio of expatriates as a percentage of the top management team should be higher for top management team should be higher for those subsidiaries which play a bigger role in those subsidiaries which play a bigger role in the MNC’s global integration.the MNC’s global integration.

5. Expatriate Dispatching


» A fundamental investment strategy which affects A fundamental investment strategy which affects the MNC’s ability to control local operations and the MNC’s ability to control local operations and integrate these businesses into global network integrate these businesses into global network during subsequent operational stages. during subsequent operational stages.

6. Entry Mode selection


» Global Product Group Structure– a product group Global Product Group Structure– a product group headquarters is created coordinate the activities headquarters is created coordinate the activities of the domestic and foreign divisions within the of the domestic and foreign divisions within the product group. product group.

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

7. Global Business Structures


» Statements, visions, customs, slogans, values, Statements, visions, customs, slogans, values, role models, and social rituals that are unique role models, and social rituals that are unique to, and used by, a focal organization to resist to, and used by, a focal organization to resist corruption practices.corruption practices.

» Anti-corruption statementAnti-corruption statement

» Vision and commitments from leadership play a Vision and commitments from leadership play a significant role in enhancing managerial significant role in enhancing managerial governance for global operations.governance for global operations.

8. Corporate Culture


» This control makes information and This control makes information and expectations about legal and ethical behaviors expectations about legal and ethical behaviors clear, increases the likelihood of detection, clear, increases the likelihood of detection, assures the punishments of transgressions, assures the punishments of transgressions, rewards desired behaviors and disciplines who rewards desired behaviors and disciplines who engage in illegal behavior.engage in illegal behavior.

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

9. Ethics Program