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Corporate governance is mainly associated to the arrangement of rights and obligations between the stakeholders involved in the business. Strong corporate governance requires processes to ensure that executives uphold the rights and interests of company stakeholders, as well as to keep those stakeholders responsible for behaving professionally in terms of maintaining, producing and distributing the resources accumulated in the business. Some of the greatest challenges in the administration of a global corporations have a lot to do with corporate governance. To the degree that a corporation participates in subsidiaries or its own subsidiaries overseas, it would be subject to a range of legal, regulatory and cultural responsibilities related to corporate governance in the country of destination. Objectives such as accountability, the elimination of conflicts of interest between parties (between shareholders and management, between small and large shareholders, between staff, managers, etc.), the effective distribution of finite capital or the encouragement of creativity are among the objectives of good corporate governance, among others. That being said, a substantial part of corporate governance analysis is focused on a universal paradigm illustrated in the principal-agent concept. The core principle of this framework is that managers and shareholders have separate access to firm-specific knowledge, and managers as shareholder agents (principals) may participate in self-serving actions that could be counterproductive to the maximization of shareholders’ wealth. This stream of analysis describes circumstances in which the interests of owners and managers are likely to diverge and suggests mechanisms that may minimize the self-serving actions of managers. In the context of Multinational Corporations, corporate governance literature shows that the degree of internationalization of the company is a significant determinant of the complexity it faces. Next, institutional gaps enhance both the expertise of senior management team experts and the uncertainty around the behaviour of managers. This adds to the classic main-agency dilemma between insiders and the management of the foreign-invested company, where outside owners are unable to track or assess managerial business decisions and results. In this climate, MNC investors must focus on financial controls and financial performance-based management compensation to ensure that management priorities are matched with the interests of the shareholders. Second, from an information-processing standpoint, the global design of MNC processes raises the difficulty of transactions and impacts how administrators handle information while designing a business strategy. This can lead to strategic mistakes even when the interests of management and shareholders are matched. In order to minimize these issues, headquarters should focus on ‘strategic’ rather than ‘financial restraints’ when developing management mechanisms for subsidiary managers. These “strategic controls” are less about short-term financial success of a subsidiary, but can be better concentrated on issues relating to its long-term viability and growth in market share, credibility and local stakeholder support. In comparison to formal, highly structured accountability and monitoring structures focused on financial metrics, strategic controls deploy a more informal system of interactions between subsidiary administrators and headquarters. Therefore, if the MNC’s goal is to harness the wealth and skills of its portfolio companies across countries and to build economies of scale that are otherwise unavailable domestically, then depending on “strategic control” will become the main thrust.
Corporate governance and the Government
From the owners’ point of view, there are countries in which the shareholding of the company is large, while in other countries, such as the United Kingdom and the United States, the bulk of the shareholding of the company is scattered (especially in companies which are listed on the stock exchange). The involvement of the family in the shareholders of the businesses often ranges from country to country, as does the presence of financial institutions (in some countries financial institutions cannot participate in the capital of non-financial companies but in other countries, not only can they participate, it is also very common). The status of the State as creditor or institutional fund will also vary from country to country, as will the degree of legal privileges of minority shareholders.
From the executives’ point of view, it is important to understand who the executives will be in the various countries, what their training is, their technical professions (whether they come from the field of manufacturing, or from the field of marketing, or banking, etc.), what the academic careers they have learned have been, what the autonomy managers will enjoy when making decisions, what their wages and incentives would be and their prospective role in the Board of Directors.
From the Board of Directors’ point of view, the structure, duration, roles or membership of the Board of Directors can vary from country to country. A much more significant point is that, in each of the industries in which the organization exists, the company analyses the degree of independence of the management with respect to the executive members, the degree of independence of the numerous board committees, the condition of directors common to a variety of companies (in many countries of the world, it is very common for many directors to be directors). In fact, in more than one listed firm, and this can offer a benefit to the company in terms of knowledge flow). In the other hand, there is a dilemma that has to do with homophily and diversity. There has been a great deal of demand in some countries to raise the diversity of boards of directors, and this is a factor that the organization needs to respond to as it spreads across the globe.
The Particularity of Corporate Governance of Multinational Enterprises.
Due to its characteristics of operating business in many countries with the parent company as the core, multinational enterprises are different from other independent commercial companies, so they have many particularity in governance issues.
1. The Particularity of Parent-Subsidiary Company Governance.
First and the foremost, owing to its multi-level and multi-legal features, the holding corporation (parent company) of a global company varies from the governance goals of a single organization. Its governance objective is not limited to performance enhancement and cost minimization, but also focuses on concentrating more on the management objective of extensionality, namely to create stable partnership between the parent-subsidiary partnership, not just to play the role of control and direction of the parent company and to represent the independence of the subsidiary, to be applied in the enterprise decision. Secondly, the conventional single organization is governed by a vertical governance path, while the multi-dimensional governance path of global corporations is defined by a fluid system and a shared collaborative governance of parent and subsidiary companies. Lastly, there is a need to coordinate the needs of the parent and affiliate companies, but all of them must be subject to the maximization of the overall interests. In this premise, the board of directors of the subsidiary corporation claims to be responsible for the subsidiary company, but in reality it is responsible for the parent company as a whole.
2. The Parent company’s Regulation and Restraint system.
The parent corporation retains full control of the companies, but there are conflicts of interest between them. As an individual portion, the subsidiary business wants to make use of such independent alternatives. Proper settlement of this matter would allow the parent company and the affiliate to play the better part. How the partnership between the parent company and the subsidiary company is balanced depends on the control relationship between the parent company and the subsidiary. First of all, indirect influence plays a huge role. In other words, the parent corporation retains and maintains control of the bulk of the board of directors of the subsidiary company. Second, there’s direct influence too, meaning the overall control of the holding corporation over its subsidiaries. Third is hybrid operation. Flexible steps should be taken between the two forms referred to above, based on the particular condition of the host nation and the subsidiaries.
3. Governance Structures have gone International.
The governance structure of domestic companies is based on domestic company law, while foreign corporate governance is largely based on the Anglo-American model and the German model. However, multinational companies have crossed the boundaries of countries at a geographical level, and the government system has transcended national character. Yet as an economic entity, multinational corporations need to be in charge. At present, the lack of an international legislative system for the governance of transnational corporations and a domestic regulatory structure for transnational corporations are not rigorous, leading to a slowdown in the governance of multinational corporations.
Advantages of Corporate Governance
Strong corporate governance will make a good business a great one. Leaders of every sector are at the helm of their respective sectors, largely due to excellent corporate governance activities.
1. Compatibility with the law.
With corporate governance in effect, complying with different legislation is taken care of easily, as corporate governance requires guidelines, regulations and policies that allow a company to remain consistent during and run without any hassle or legal nuisance whatsoever.
2. Minor Punishments and Fines.
As the regulatory enforcement element is taken care of credit with corporate ethics activities, businesses are willing to save money on needless fines and compliance and potentially divert these assets to company goals in order to reach higher standards.
3. Improves Management.
Since there is a framework in place for how the organization functions, the day-to-day operation of the entity, the monitoring of the operations and the fulfilment of the goals can become much simpler. The work environment often takes care of itself on the basis of sound corporate governance concepts that promote collaboration, unity, productivity and a drive for success.
4. Reputation and Relationship
Companies with sound corporate governance are able to retain customers and foreign financiers with relative ease, on the basis of their strong standing and brand value. Transparency, which is the process of exchanging key organizational knowledge with clients, is one of the foundations of corporate governance. This strengthens the bond between the corporation and its owners and sows the seeds of trust between the business and community at large.
5. Less disputes and Frauds:
The rules instilled in the workplace enable workers to be morally mindful of any situation they experience, thereby eliminating the risk of deception and dispute between employees.
Disadvantages of Corporate Governance
When it comes to the matter of smaller companies, there may be a bit of an issue where owners may act as directors and administrators, and there may be no distinction as well. Keeping this in mind, this gives rise to:
1. The Burden of being legally compliant:
Corporates usually have lots of regulations that need to be met, attracting various legislations depending on their business. Corporate governance guarantees ethical enforcement, but comes at a very high price.
2. Higher Costs:
Administrative expenses for businesses requiring corporate governance are rather exorbitant, given all the criteria that needs to be met. Some of the documents that need to be kept in check are stock sales and acquisitions, legal compliance reports, annual registration.
3. Maintenance of Separation:
Notwithstanding the size of the company, all formalities and specifications must be complied with without reservation. Failure to comply with these laws leaves an organization with considerable visibility, such as a corporate veil piercing, where the distinct legal identity of a business is overlooked in order to explain what is happening behind closed doors.
4. The Disagreement between the Principal and the Agent
Big companies have made it a common practice to select a well-known boss, one with a clear record of day-to-day business activities. Unfortunately, this gives rise to a confrontation between owners and management, all of whom may have very different goals and viewpoints. This also leads to a clash between the two, impacting the overall ability of the organization to function in a smooth and productive fashion.
In a simple context, corporate governance relates to the way a corporation works. The rules, laws, procedures and practices implemented by a company organization, the manner in which it works internally, are all part of corporate governance. It is of the utmost importance that the administration of an organization ensures that effective and reasonably consistent procedures and processes are implemented that protect the interests of those concerned. In a world where transnational corporations are a hundred or so, in a scenario where everything goes south, the effects of this tragedy would affect many nations, some in a far more detrimental way than others.
- Corporate Governance and CSR Approaches of Multinational Companies: An Integrated Perspective (city.ac.uk)
Author: AABIR SHOAIB, Chandigarh University.
Editor: Kanishka Vaish, Senior Editor, LexLife India.