1. Chapter 4
Corporate Governance at Multilevel: The
Parent- Subsidiary Link

2. Multilevel Corporate
Governance in MNCs

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

4. Multilevel Corporate Governance in MNCs
 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
directors on the board; (2) controlling the nomination
and appointment of key personnel and (3)
implementing codes of conducts, ethical standards,
and transparency practices set by the parent.

5. Multilevel Corporate Governance in MNCs
 In the second case (when a subsidiary is not listed on
a local exchange but has its own board to meet a
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.

6. Multilevel Corporate Governance in MNCs
 Japanese MNCs illustrate some specific roles played by
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
5. provide knowledge of local social, economic, and
political conditions and
6. appraise and attempt to minimize the subsidiary’s political
risk.

7. Multilevel Corporate Governance in MNCs
 These roles are a combination of environmental
sensing, decision-making, advising, and monitoring
roles.
 Kriger (1988) offers some interesting survey results
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.
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.

8. Multilevel Corporate Governance in MNCs
3. An activated board can encourage officers to
have a greater interest in the corporation and a
strong sense of responsibility.
 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.

9. Multilevel Corporate Governance in MNCs
3. Periodically appraise the performance of the
subsidiary’s management, primarily through review
of its financial reports and statements.
4. Counsel the company regarding local
compensation standards
 Japanese MNCs appeared to have a strong desire
to dig “deep roots” into the host countries in which
they operate whereas North American MNCs were
less likely to view a particular host country as
requiring such “deep roots”.

10. Multilevel Corporate Governance in MNCs
Understanding multilevel skills
First tier governance influences the
second tier governance through
ownership holding, organizational
coordination, corporate support and
performance monitoring.

11. Multilevel Corporate Governance in MNCs
 Second tier governance in turn channels back
to the first tier through advice provision,
governance sharing, information reporting and
directorate expansion.
 Parent board is often the utmost or final
authority to approve large investments
oversea.
 In corporate governance the shareholders
have the last word.

12. Multilevel Corporate Governance in MNCs
 To do a good job, local board members must
also have the full confidence of top executives.
 Second, parent board and subsidiary
management are linked despite the very weak
magnitude and infrequent manner.
 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.

13. Multilevel Corporate Governance in MNCs
 Finally, the relationship between parent
management and subsidiary management
which is obviously stronger than all other links.
 To foster corporate governance :
 strengthen transparency, coordinate interest and
implement conduct codes.

14. Corporate Governance and
Subsidiary Roles

15. 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 underlying strategic choices are
the:
a. Geographic localization of activities.
b. The degree of integration of those activities with
the same activities in other subsidiaries of the
firm.
A subsidiary that performs most activities in other
activities chain has two different options:
a. Autonomous from headquarters
b. Integrated with headquarters

16. Corporate Governance and Subsidiary Roles
 Accordingly, corporate governance should cope with
three identities:
a. Autonomous subsidiary
b. Receptive subsidiary
c. Active subsidiary
 Second classification scheme of subsidiary roles is
Gupta and Gorindarajan’s approach that focuses
on knowledge/resources flow patterns. Intra-corporate
knowledge flow is defined as the transfer of either
expertise or external market data of strategic value.

17. Corporate Governance and Subsidiary Roles
Two dimensions involving knowledge flow that is:
a. the extent to which the subsidiary receives
knowledge inflow from the rest of the corporation
b. the extent to which the subsidiary receives
knowledge outflow from the rest of the corporation.
As a result, four generic subsidiary roles can be
defined:
a. Global innovator role
b. Integrated player role
c. implementer role
d. Local innovator

18. Corporate Governance and Subsidiary Roles
 The third scheme is made by Barlett and Ghoshal.
There are four categories:
a. Strategic leader
b. Contributor subsidiaries
c. Implementer subsidiaries
d. Black hole subsidiaries
 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.

19. Corporate Governance and Subsidiary Roles
In light of above factors, a subsidiary can be defined as
one of five types:
a. Miniature replica
b. Marketing satellite
c. Rationalized manufacturer
d. Strategic independent.

20. Corporate Governance and Subsidiary Roles
Corporate strategies and governance design
 Multi domestic strategy: A multi domestic
strategy is one in 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 competition within each country.
 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.

21. Corporate Governance and Subsidiary Roles
 Transnational strategy: A transnational strategy is a
corporate strategy that seeks to achieve both global
efficiency and local responsiveness. Realizing the diverse
goals of the transnational strategy is difficult because
one goal requires close global coordination, while the
other requires local flexibility.
 The three global integration strategies have implications
on the design of the global corporate governance as
well. As the global integrations strategy moves from the
global to transnational and then to multi domestic,
subsidiary board is becoming more important for an
MNC’s global corporate governance because required
local responsiveness heightens with this shift.

22. Managerial Governance in
Global Business

23. 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.
 While managerial governance emphasizes those
internal processes and structures that regulate
operational decisions and business activities undertaken
by an MNC’s various subunits.

24. Managerial Governance in Global Business
- Includes the systems that bring about internal
adherence within the corporation to a set of strategic
goals designed by top management through using
corporate power or authority.
- Is a more direct intervention involving output
monitoring, bureaucratic monitoring, and cultural
monitoring.
- Directly impacts corporate transparency,
accountability, and ethics, which in turn determine the
effectiveness of corporate governance.

25. Managerial Governance in Global Business
- Nurtures corporate governance by providing an
improved organizational platform to perform internal
control, information disclosure and financial or non-
financial auditing and to bolster corporate integrity
and ethical practices.
- Is more relevant in the global setting.
- Is manifested in control, coordination, and
orientation.

26. Managerial Governance in Global Business
 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 between
different task units within the organization.
 Coordination is associated with integrating activities
dispersed across subsidiaries. Control is a more direct
intervention into the operations of subsidiaries.
 Coordination is distinguished not by direct
intervention but by situating the subsidiary in a network
of responsibilities.
 Compared to control, coordination is less direct, less
costly, and has a longer time span.

27. Managerial Governance in Global Business
 MNC parents are often unable to use centralized
decision-making process to maintain global managerial
governance and control for several reasons.
1. The diversity of countries in which the firm operates,
the differences in the extent of integration across
functions, and the firm’s evolving product
diversification.
2. Maintain the proper global integration-local
responsiveness (I-R) balance is an ongoing process
which requires occasional reassessment.
3. There may be no single vantage point within the firm
from which to consider all of its needs.

28. Managerial Governance in Global Business
 Coordination’s contribution to global managerial
governance has two dimensions:
1. Breadth of coordination - refers to the number of
other units with which a subsidiary coordinates.
2. Diversity of coordination – the number of functions
coordinated.
 The process of coordination requires mechanisms which
can be divided roughly into two groups:
1. Formal Group – contains four mechanisms comprising
centralization, formalization, planning, and behavioral
control
2. Subtle Group – includes three kinds of managerial
mechanisms, namely lateral relations, informal
communication, and organizational culture.

29. Managerial Governance in Global Business
 MNCs are increasingly using strategic orientation in lieu
of conventional controls to monitor the operation of
foreign subsidiaries and to perform managerial
governance.
 Strategic orientation is an efficient mid-range
instrument linking global integration with local
responsiveness. Compared to control and coordination,
strategic orientation arrangement is the least direct,
least costly, and has the longest or most sustained
effect.

30. Managerial Governance in Global Business
 Managerial Control is further composed of output
control, bureaucratic control, and cultural control.
 Output controls require very little managerial direction
and intervention, and hence they are likely to result in
attempts to influence how individual activities are
performed.
 Bureaucratic control is extensively employed by MNCs.
It consists of a limited and explicit set of codified rules
and regulations which delineate desired performance in
terms of output and/or behavior.
 A number of organizational practices facilitate the
existence of a cultural control system. The use of a
cultural control system has several implications for
selection, training, and monitoring of organizational
members.

31. Managerial Governance in Global Business
Tools of Managerial Governance
1. Information Systems
» Data Management and Information System
tools can be used to control the following:
§ the kinds of information gathered systematically by
members of the organization;
§ how such information is aggregated, analyzed, and
given a meaning;
§ how, in which form, and to whom it circulates;
§ how it is used in major decision
» Management tools ensure that relevant differentiated
information will be brought to bear on decisions.

32. Managerial Governance in Global Business
2. Managerial Mechanisms
» Planning processes can catalyze the strategic
convergence and consensus building among
executives whose initial perceptions and priorities
may differ widely.
» Conflict Resolution- provides the necessary
channels for confronting perceived needs for
integration and responsiveness.

33. Managerial Governance in Global Business
3. Human Resource Administration
» Market tools include more typical human resource
management components such as shaping
careers, reward and punishment systems and
management development.

34. Managerial Governance in Global Business
4. Communication Systems
» Frequency, informality, openness and density of
communications between a focal subsidiary and
the rest of the corporation should be higher for
those subunits which play a greater pat in global
integration.
» Informal Interactions- process through which
subsidiary managers’ values and norms become
aligned with those of the parent corporation.

35. Managerial Governance in Global Business
5. Expatriate Dispatching
» The ratio of expatriates as a percentage of the top
management team should be higher for those
subsidiaries which play a bigger role in the MNC’s
global integration.

36. Managerial Governance in Global Business
6. Entry Mode selection
» A fundamental investment strategy which affects the
MNC’s ability to control local operations and
integrate these businesses into global network
during subsequent operational stages.

37. Managerial Governance in Global Business
7. Global Business Structures
» Global Product Group Structure– a product group
headquarters is created coordinate the activities of
the domestic and foreign divisions within the
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.

38. Managerial Governance in Global Business
8. Corporate Culture
» Statements, visions, customs, slogans, values,
role models, and social rituals that are unique to,
and used by, a focal organization to resist
corruption practices.
» Anti-corruption statement
» Vision and commitments from leadership play a
significant role in enhancing managerial
governance for global operations.

39. Managerial Governance in Global Business
9. Ethics Program
» This control makes information and expectations
about legal and ethical behaviors clear, increases
the likelihood of detection, assures the
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.