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)