Accounting 4570/5570

Ch. 12 – Corporate Governance and Control of Global Operations

Global Strategic Issues

Globalization – the deepening relationships and broadening interdependence among people from different countries.

Multidomestic approach – individual subsidiaries autonomous Products differ from country to country

Global – worldwide system Can benefit from worldwide volume Emphasis shifts toward greater centralization

Centralization vs. Decentralization

Centralization - decision making in a few key centers

Decentralization - decision making spread out amongst the organization

Global Terms

Global competition - occurs when companies cross-subsidize national market share battles in pursuit of global brand and distribution positions

Global businesses - the minimum volume required for cost efficiency is not available in the company’s home market

Global companies - have distribution systems in key markets that enable cross-subsidization, international retaliation, and world-scale volume

Transnational Strategy

National units make differentiated contributions to integrated worldwide operations

Each national unit plays a different role that varies from country to country

Knowledge is developed jointly and shared worldwide

Figure 12.2, page 308

Informal and Subtle Mechanisms

Lateral relations: task forces and meetings

Informal communication Organization culture

Allows things to be done by different people in different countries in similar or consistent ways

Firms start out with formal structures for control and then shift to informal structures as they internationalize

Organizational Structure

Organizational Structure Export group - domestic structure (Figure 12.3,

page 309) International division - foreign production

(Figure 12.4, page 310) Global structure (multidomestic)

Works best when country or regional expertise is more important than product knowledge and expertise

Figure 12.5, page 311

Organizational Structure

Organizational Structures (continued) Product orientation (global company)

Works best when the product line is wide or the products are complex and subject to rapid technological change

Figure 12.6, page 312

Global grid/matrix structure Report to two bosses Figure 12. 7, page 312

Corporate Governance

The determination of the broad uses to which organizational resources will be deployed and the resolution of conflicts is among the myriad participants in organizations.

Internal governance mechanisms Controlled by owners of the firm Board of directors

Audit committee, Compensation committee, other committees

Ownership structure

Corporate Governance

Internal governance Boards should have a large proportion of

outside independent members CEO and Chairman of the board should not be

the same person Dispersed ownership – many owners who

do not know each other Concentrated ownership – banks and

wealthy families tend to own controlling interests in firms

Corporate Governance

External governance mechanisms Takeover market Legal systems

Common law systems tend to protect small, individual investors

Civil code systems tend to protect large institutional shareholders

Corporate Governance

International importance U.K. – 1992 Cadbury Report

Recommended outside, independent directors Specific committees (audit, remuneration,

nominations) Keep chairman and CEO positions separate

Debate over whether codes should be enforced by law

Scorecard for German Corporate Governance Exhibit 12.1, page 318-9

Corporate Governance

International Practices Some German and Austrian companies have

two tiered boards – a managing board and a supervisory board

Japanese firms will appoint outside directors to companies with poor performance – banks are very active

Russian boards are controlled by insiders U.S. – board size negatively affects firm

performance and the quality of decision making

Corporate Governance

International Practices Executive compensation is increasingly

becoming performance-based throughout the world

Ownership structure Is disbursed in the U.S. and the U.K. Is concentrated in Germany and Japan Concentrated ownership is more common

outside of the U.S. and the U.K. Takeover markets are strong governance

controls in the U.S. and the U.K. but not elsewhere

Corporate Governance

U.S. Sarbanes Oxley Act of 2002 Strict reporting requirements for public firms in

the U.S. and those foreign firms listing on the U.S. stock exchanges

It is management’s responsibility to maintain an adequate internal control structure over procedures for financial reporting

Must issue yearly report on the internal controls that is audited by an independent auditor.

Applies to all subsidiaries of the listed companies

Global Information Processing

Four types of information flows: Routine - frequent, homogeneous Nonroutine - unique and infrequent Sequential - information flows in a

predetermined direction Reciprocal - information flows back and forth

between parties Concerns

Privacy National security Governments

Knowledge Flows

Global innovator - subsidiary provides knowledge for other units.

Local innovator - subsidiary innovates locally but its innovations are of little value to the rest of the firm

Integrated player - subsidiary creates knowledge that is shared with other units

Implementor - subsidiary receives knowledge from the other units

Figure 12.10, page 331

Cases

General Motors (Exercise 1) Hoeschst (Exercise 2)