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
competency in local operations and the organizational expertise
needed for such operations
1) 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.Helping
subsidiary management anticipate necessary strategic changes.
reviewing local subsidiary operations.
4.Helping subsidiary management anticipate necessary strategic
changes.

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

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

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. 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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