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Chapter 12

Corporate Governance and


Control of Global Operations

Global Strategic Issues

Globalization refers to the deepening of


relationships and interdependence between people
throughout the world
Companies are multi-domestic or global

Multi-domestic approach allows subsidiaries to compete


independently in domestic markets
Example Philips
Global approach pits the worldwide system of product and
market position against the competition
Example - Matsushita

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Global Strategic Issues


Hout,

Porter, and Rudden (1982) findings

Multi-domestic strategic companies

Have products that differ from country market to


country market
High transportation costs
Economies of scale may be too modest
R&D closely tied to a specific market
Government barriers to trade are too high
Distribution systems are fragmented and impenetrable

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Global Strategic Issues


Hout,

Porter, and Rudden (1982) findings

Global strategic companies

Benefits gained from worldwide volume exceed costs


of serving that volume
Usually more centralized than multi-domestic strategic
companies
See example at chapter end Proctor and Gamble
and Unilever

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Global Strategic Issues

What does global mean?


Hamel and Prahalad (1992) definitions
Global Competition

Firms attack competition in markets worldwide


Example U.S. auto industry in the 1980s

Global Business

Minimum volume required for cost efficiency is not available in


home market, so overseas markets are pursued, possibly
supplied with domestic production
Examples Chinese textiles, Boeing and Airbus

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Global Strategic Issues

Hamel and Prahalad (1992) definitions


Global Companies

Have distribution systems in key markets that enable crosssubsidization, international retaliation, and world-scale volume
Example Airline industry

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Global Strategic Issues


Bartlett

3 Global Imperatives

and Ghoshal (1989) findings

Forces for global integration the need for efficiency


Forces for local differentiation the need for
responsiveness
Forces for worldwide innovation the need for
learning

Companies must deal with all 3 simultaneously


Companies should use a transnational strategy

Corporate assets are dispersed, interdependent, and


specialized

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Components of a Total Global


Strategy Fig. 12.1

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Global Strategic Issues


Example

Toyota

Toyota partnered with PSA Peugeot Citron to


build small cars in the Czech Republic to supply
the European market
The factory was designed, built, and tested in a
virtual factory in Japan (Edmondson, 2005)
The plant will be run by Japanese and French
managers and monitored in Japan

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Informal and Subtle


Mechanisms of Control

Lateral relations

Informal communication

Task forces and meetings help throughout the formal


structure to accomplish corporate objectives
Involves the network of personal contacts that one
develops over time in the organization

Organizational culture

The outcome of the process of socializing individuals within


a firm and across national boundaries, which allows things
to be done by different people in similar or consistent ways.

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Organizational Structure

Two major classifications for coordinating activities


in MNEs

Structural and formal mechanisms


Informal and subtle mechanisms

Control is shifting from formal to informal


mechanisms
A firms organization is constantly evolving
Failure to adjust to a changing environment can lead
to internal conflict and poor performance

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Evolution of Organizational
Structure
Export

activities start in the form of


occasional orders from foreign buyers
An export department is then developed with
internal, rather than external, experts
Foreign sales increase and foreign sales
offices are established

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Domestic Organization with


Export Group

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

International Division
Structure
May

become necessary to develop foreign


production facilities
A new international division replaces the old
export division with substantial autonomy
The firm can possibly be split into two rival
factors (domestic and international)

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Global Structure

To avoid a divisional conflict, a company adopts a


global product structure or global geographic structure
Differences between domestic and international
divisions are eliminated
Companies select structure based on products and
market

Global product structure is favored by companies with


simple, stable product lines
Global geographic structure is favored by companies with a
wide range of complex products

New conflict emerges between product divisions and


geographic divisions

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Geographic Structure

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Product Structure

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Global Structure
Global

Product dimensions, geographic areas, and


functional areas share power and responsibilities

The

grid/matrix structure emerged

matrix has shortcomings

Bartlett and Ghoshal (1989) point out that


confusion and turf battles occurred.

Organizational

problems are more complex


than organizational structure

Many involve the attitude of top management

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Matrix or Grid Organization

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Corporate Governance

All business activities consist of two things

Shareholders have been concerned lately with how


resources have been used

A set of resources
People who make those resources profitable

Examples Enron, WorldCom, Parmalat

The role of the board of directors to check


management has been a hot topic lately
Large institutional investors are focusing on
shareholder activism

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Internal Governance
Mechanisms
Internal

governance mechanisms are


established to insure the proper actions of
management

Roles of the Board of Directors

Hire, control, and fire management


Determine managements compensation
Composed of multiple committees
Board members are appointed by the owners
Should have a majority of outside members

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Corporate Governance
Mechanisms

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Internal Governance
Mechanisms

Ownership structure

Determines how capital will


come into the firm
Determines how wealth will
be distributed

Difficulties occur when firms


from one structure invest in
a country with a different
structure

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Internal Governance
Mechanisms

Example - Millman and Wonacott (2005)

Chinese firms have invested in South America to gain


access to raw materials and markets
Chinese managers are accused of separating Chinese
workers from regular workers and of not working with
local suppliers and businesses
The Chinese are having difficulty coping with a
different labor and ownership environment

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

External Governance
Mechanisms

Takeover market

Firms can be purchased by new owners who believe they


can make the firms more profitable
More developed in countries with highly developed
securities markets

Legal system

Can offer protection to investors and encourage the


investment
Example common law in U.S. and U.K.
Example code law in Germany and France
Can deter investors if there is a lack of protection

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

International Importance of
Governance
Recent

corporate meltdowns have shattered


customer confidence worldwide
As a result, Codes of Best Practice have
been created
Cadbury Report (U.K.) board requirements

A specific number of outside directors


Committees to carry out board functions
Separating the roles of chairman and CEO

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

International Importance of
Governance
Scorecard

for German Corporate


Governance

Reflects Germanys legalistic approach

Governance

alone is not enough to combat

fraud

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Studies on International Corporate


Governance Practices

Board of Directors - Denis and McConnell (2003)


U.S. main goal is to protect shareholder
interests
Europe most countries do not have laws
governing the role of the board of directors

Japan appoint outside directors when in trouble

Some have two-tiered boards, as in Germany


Use banks for the role of outside governance

Russia insiders control the board

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Studies on International Corporate


Governance Practices

Board of Directors Denis and McConnell (2003)

Higher proportion of outside directors does not mean


higher profitability
Higher proportion of outside directors positively impacts
decisions concerning
Acquisitions
Executive compensation
CEO turnover
Board size is negatively related to
Firm performance
Quality of decision making
Independent directors are more likely to fire management

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Studies on International Corporate


Governance Practices
Executive

Compensation

Goal is to align managements goals with


investors goals
U.S. studies have shown that sensitivity of pay to
performance has increased over time
Stock options are the fastest growing type of
executive compensation in the U.S.
Japan and Spain are following suit

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Studies on International Corporate


Governance Practices

Ownership Structure

Market-centered economies U.S. and U.K.


Ownership tends to be dispersed
Bank-centered economies Japan and Germany
Ownership tends to be concentrated
Outside of the U.S., concentrated ownership indicates
positive firm performance
Study of East Asian countries revealed a positive
relationship between government and bank ownership and
firm performance
Privitization of business has a positive effect on profitability

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Studies on International Corporate


Governance Practices
The

A hostile takeover occurs when a firm is


purchased without soliciting bids
U.S. has the most active market

External Control Market

Example Molson and Coors

U.K. also has an active takeover market


External market has not been shown to be a
common governance control tool

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Studies on International Corporate


Governance Practices

The Legal System

Preference for concentrated ownership can be explained


by legal system (La Porta et al. 1998)
Common law system U.S. and U.K.

Civil law system France and Germany

Provide strongest degree of protection for shareholders


Tend to have more dispersed ownership
Three largest shareholders own 20% of the firm
Provide the least amount of protection for shareholders
Tend to have more concentrated ownership
Three largest shareholders own 45% of the firm

If the law does not protect the owners from the controllers,
the owners will seek to be controllers.
(Denis and McConnell 2003)

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Cross National Differences in


Corporate Governance

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Cross National Differences in


Corporate Governance - Capital
Refers

to the shareholders or owners


Shareholders exercise control in 2 ways

Commitment length of holding shares


Liquidity active buying and selling of shares

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Cross National Differences in


Corporate Governance - Capital

Three Factors of Shareholder Control


Property Rights

Financial System

In countries that favor large shareholders, owners tend to exercise


control through commitment
Example Japans property rights favor banks
U.S. laws tend to favor small shareholders, who exercise control
through liquidity
Bank-based system commitment (Germany)
Market-based system liquidity (U.S.)

Interfirm Networks

Japan and Europe have these; tendency toward commitment


U.K. tendency toward liquidity

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Cross National Differences in


Corporate Governance - Labor

Influence exercised by employees depends on three


factors

Representation rights
Strong representation = internal participation
European countries have strong representation
Union organization
Class-based and craft-based unionism = external
participation
Enterprise-based unionism = internal participation
Skills formation
Portable skills = external participation (U.S.)
Firm-based skills = internal participation (Japan)

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Cross National Differences in


Corporate Governance - Management
Ideology

General knowledge and hierarchical decisions

U.S. and France finance focus

Scientific specialization and consensual decisions

Greater commitment to the firm (Germany)

Career

Closed managerial labor markets (Japan)

Formation

Greater commitment to the firm/very specialized

Open managerial labor markets (U.S.)

Less commitment to one firm/more autonomy

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Internal Controls
COSO

Framework

Control Environment control consciousness of


the people
Risk Assessment risk management of all
sources of risk
Control Activities policies and procedures
Information and Communication communicating
significant information to the right functions
Monitoring assessment of system performance
over time

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

The Sarbanes-Oxley Act of


2002
Section

404

Establishes managements responsibility for


internal controls
Management must assess controls annually
Managements assessment must be assessed by
an independent auditor
Effective November 15, 2004
Foreign firms listing in the U.S. July 15, 2005

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

The Sarbanes-Oxley Act of


2002
Cost

of compliance is tremendous!

E&Y showed that large U.S. firms would spend


more than 100,000 hours to comply with 404

Foreign

listings on NYSE are decreasing

Large new listings have not declined

Some

say increased transparency is an


advantage to firms
Countries must be compliant in all countries
of operation
International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

The Role of Information


Technology in MNEs
I.T.

is now a key strategic function in firms


Enterprise Resource Planning (ERP) has
helped to link departments and functions into
one system

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

The Role of Information


Technology in MNEs

Advantages of ERP
include

Integration of customer
order information
Reduction in inventory

Problems of ERP
include

Training costs
Integration and testing
Consulting fees

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Theories and Realities of


Global Information Processing
Egelhoffs

(1991) 4 dimensions of processing

Routine inputs are frequent and homogeneous


Nonroutine info is unique and infrequent
Sequential info flows in a predetermined
direction
Reciprocal info flows in a manner not previously
determined

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Theories and Realities of


Global Information Processing
Accounting

info for MNEs tends to be routine


and sequential
Accounting info must have extensive reach
Internationally, the key is to determine how to
share information across organizational lines

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

MNEs and Transborder Data


Flows

Management of info is as important as management


of assets and production
Some countries have legislation affecting
transborder data flows
Concerns over transborder data include

Employee information
Industrial espionage involving data piracy
Political espionage
Theft of industrial properties and designs

Fiber optics are improving data flow worldwide

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Final Thoughts on MIS and


Strategy
Firms

with a multi-domestic approach do not


integrate as much as firms with a global
orientation
MNEs that follow the transnational model
tend to be more interactive

These MNEs will be more reciprocal than


sequential in data flow

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Knowledge Flows in MNEs

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Final Thoughts on MIS and


Strategy
Mirchandani

and Lederer (2004) found that


the systems function is treated differently
than traditional functions (marketing, finance,
manufacturing)
MNEs may want less autonomy in systems to
ensure compatibility among systems
MNEs are concerned with data security, so
systems design may be less autonomous

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

Centralization, Strategy, and


the Accounting Function

The degree of centralization may affect the nature of


the accounting control function
MNEs need to implement a system that provides
flows of information between all combinations of
affiliates and parents
This needed system is not highly decentralized or
centralized
Record-keeping is often complex, but can be
controlled by the parent company

Example Coke and its policy manuals

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,

The Use of Internal Controls


3

methods used to develop a global


orientation are

Develop and communicate a clear and consistent


corporate vision
Manage human resource tools effectively
Integrate individual thinking and activities into the
broad corporate agenda by means of co-option
(developing a more global perspective)

Accountants

must have a global vision

International Accounting & Multinational Enterprises Chapter 12 Radebaugh,