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Corporate Governance Of The MNCs In Advanced Economies.

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Question:

Discuss about the Corporate Governance of the MNCs in Advanced Economies.
 
 

Answer:

Introduction

MNC stands for multinational corporations. These are corporate organizations that own and control of production or operate in at least one country which is not the home country. Corporate governance defines the way in which these business enterprises are controlled or directed. It divides and clearly brings out the rights, responsibilities, and mandates held by different people in the company such as the terms of the board of directors, the managers, those of shareholders and other stakeholders. It also covers the procedures that are to be taken in the process of decision making on the affairs of the corporation (Kay 2015). Corporate governance structures play a significant role in motivating the manager to increase the value of the firm instead of focusing on the personal ambitions and therefore ensure that the people in the lower positions in the structure can be able to get correct and reliable information (Pablos & Lytras 2008, pp 48-55).

Good corporate governance should ensure work to make sure that there is an alignment between the interests of the managers in the top positions and those of the stakeholders. This is well explained in the agency theory which tries to solve problems that arise due to unaligned objectives between the managers, shareholders, and entrepreneurs. This approach tries to address tries to solve two main problems; firstly, it attempts to resolve the problem that occurs in the case of conflicting interests and goals between the principal and the agent. Secondly, it also addresses the issue of sharing the risks that arise when the principal and the agent are having conflicting attitudes towards the risk. The theory is, therefore, important in handling the concept of corporate governance (Moebert et al., 2007).

 

Corporate Governance systems in MNC’s

Corporate governance in the MNCs can view from a broad perspective to be of two types. Firstly, the management by the board of directors, control on business ownership team of the organization, all on the internal side of the body. They have a lot of direct control on the individual business enterprise's profitability. They, therefore, need to be competent, result oriented and people of excellent values. The external governance of the organization is influenced by the patents, policies, and regulations of the country of operation, the foreign market among other influences. Both types of governance of the MNCs should not be overlooked since they have a significant impact on the functioning of these organizations (Edwards 2011, pp. 267–290).

Various approaches exist to handle the corporate governance in the MNCs. Firstly, MNCs employ two related corporate governance tiers. Firstly, they apply the parent level corporate management which controls and defines the way rights, mandates and responsibilities of the parent company are shared across (Sun 2009).  Secondly, they have the subsidiary level corporate governance which defines how other subordinate companies have their board of directors and other shareholders, but at the end, they are work in integration with the parent company. Subsidiary governance will have their branch companies run and managed as if they are independent of the parent company, but at the end, they are connected in as much as they may not be fully owned by the MNC (Albu 2013).

Corporate governance together with managerial governance forms the organizational management. Corporate governance is in charge of control of the company’s affairs while managerial governance is concerned with the internal processes, decisions, and the business activities. Both types of organizational management are critical for the operation of the business enterprise, and they all work together in the realization of the company's goals and objectives. MNCs also employ these types of organizational governance (Ghita 2008).

Corporate governance of MNCs has many aspects that differentiate them from the corporate governance of the domestic firms. These elements include MNCs having more demanding shareholders across the globe, their governance structures being complex, employment of multi-tier management systems among other aspects. Therefore, corporate governance of MNCs is much more complex than that of the domestic firms due to the complex management systems involved (Crawford 2007). The people participating in the governance of these companies, therefore, need to be competent, hardworking, of high integrity, ability to establish a good relationship with others and should generally be people of excellent personal values.

Advanced Economies

An advanced economy is a term used to describe developed countries. It refers to the countries that have advanced technologically, infrastructure and the general life of people. This is mostly determined by the gross domestic product (GDP), the per capita income, gross national product (GNP), infrastructure, industrialization level and the general people’s living standards CIA (2008). It is also true that in determining the advanced economies, there does not exist any numerical count or convention that is set for establishing the advanced economies but rather is based on whether the country is developed or not. These estimations may not be accurate in some cases. Given the fact that corporate governance of the MNCs in the advanced economies has a significant influence on the sustainability and profitability of these firms, they have tried to put in place systems that are well structured and organized for their smooth operation.

 

Characteristics of Corporate Governance of MNCs in Advanced Economies

Corporate governance of MNCs in advanced economies is characterized by execution of many instruments and mechanisms to survive in the changing needs of the globe and the differences and issues that arise from the cross-country operations. This governance is developed with some strategies that suit the environment. The policies have also helped the MNCs to have some set of standards that are useful for their operation in those countries (Clarke 2007).

Firstly, the board composition for MNCs in advanced economies is made up of both inside and outside directors. The board of trustees plays the critical role in the success of the business enterprise since they are the key drivers of the organization. The inside directors play a part in the decision-making process, and they can access information. Outside directors have more powers than the inside ones. They are final decision makers and them in charge of evaluating the strategic directions and the management behaviors. For this reason, the MNCs, therefore, choose the board of directors who are competent, good personality and with the high commitment among other good virtues (Mingst 2014).

Corporate Governance of MNCs in Advanced Economies is also characterized by market discipline. This occurs when a given firm's management fails, poor performance or failure of the internal controls, the company is then made open for corporate control. Poorly performing companies are subject to being taken over by some other company which is much more powerful. The powerful company is willing to take over this poor performing company. This is cost effective since the company will easily get the assets required in the country it wishes to operate. This, therefore, shows that the corporate governance of MNCs must have market discipline since other world companies are watching it (William 2013). Failure to observe market discipline will directly impact the firm’s operation negatively, and their operation in the market may become extinct. MNCs are therefore judged with the responsibility of maintaining market discipline.

The board chairmanship also categorizes the corporate governance system for MNCs. This refers to whether the operating CEO of the firm is working as the chairperson the board of directors. The case where the operating CEO can work as the board chairman, time reduces accountability and reduces the proper functioning of the board. It is also evident that when MNCs in advanced economies expand, they require chairperson for the smooth operation because their operation becomes more complicated (Eun et al. 2013). Chairmanship greatly helps in the coordination and smooth operation of the firm. This is important since smooth management of the MNCs gives the firm a good competitive advantage and therefore significantly impacts on the profitability and sustainability of these organizations.

 


Regarding the board size, the MNCs are characterized with either too small board size or too large one. Small-sized is seen to be easily convinced by their CEO. They also have the shortage of expertise. On the other hand, the large board might be having the required knowledge, but in most cases, they suffer from conflicts in the group (William, 2013). An agreed compensation also characterizes the MNCs in advanced economies through all countries of operation. The compensation is directly related to the responsibilities they hold in the organization. They also receive incentives for their performance (Wu 2017).

The MNCs are also seen to operate with independent auditors handling the affairs of the organization. This is mostly through governance based on discipline. The independent auditors are usually both internal and external. They work to evaluate the integrity of the financial reports and identify misconduct in the financial statements. These identified faults are punishable. External auditors are appointed by the shareholders but not the management. The audit team, therefore, plays an important role in the operation of the MNCs in these advanced economies and in general (Doob 2013).

Culture-based governance is also observed as a characteristic for these MNCs. The management culture defines the way the firm is governed by company visions, core values, mission, slogans among others; the corporate integrity defines the normal moral standards in the organization. It also entails the determination of the ethical climate of the firm.  It is, therefore, the role of the board and other key executives to ensure that culture-based governance is well taken care of in the MNCs (Mingst 2014, pp. 310). This plays a crucial role in the profitability and sustainability of the organization.

The MNCs also have ways of handling misconducts. They have established systems of punishing those who does not abide by the firm's rules and expectations. This could arise from poor handling of the company's assets, failure to adhere to the expected code of conducts among others. In the event of such misconduct, the MNCs are characterized by the application of methods such as demotions, salary freezing or reduction, the imposition of fines, dismissals among others. These established methods to handle misconducts make people abide by the organization's expectations and therefore reduced occurrences of illegal behaviors (Schermerhorn 2009, pp. 387).

 

Comparison of CG Systems in China with Advanced Economies

China is among the countries with high investment in foreign countries (high OFDI). This has, therefore, made the MNCs have a lot of interest in making the branch firms in those countries to align with those of the headquarters. Corporate governance with better control helps organizations to improve their profitability, organization's sustainability, increased competitive advantage and the general corporate performance. The corporate governance system of MNCs in China is not different from that of the other advanced economies (Caldwell & Xiong 2010).

China's corporate governance can be categorized into two types. These are the external management and that of the organization's internal management. The firm’s internal governance is made up of the board of director’s controls, the ownership and monitoring and that of the managerial team. This usually has effects on the profitability of the firm especially in the individual countries of operation (Treanor 2009). On the other hand, the external governance of the MNCs in China entails the issues coming from the outside market, and the policies, rules, and regulations of the government. Both of these types of corporate governance are critical for MNCs, and they always apply them appropriately for their better operation and performance (Bjorkman et al. 2008,  pp 964-978).

Like other MNCs in advanced economies, the China's MNCs are also characterized by the board of directors who are well documented. The board judged by the main responsibility of reducing the costs that arise from a distance between the ownership and the decision control of the firm. They, therefore, play an important role in the general control of the China's MNCs. Also, China's MNCs have well-documented relationship definition between the structure of the firm ownership and that of its performance. Some organizations in China are family owned, institutionally owned or government owned. Institutional ownership of these business groups is the most common type in China. Again, the corporate governance of China is uniquely identified with significant institutional shareholdings through legal person shareholder or state person shareholder (Ionescu 2010).

Also, Chinas government is defined with managerial incentive. This describes the compensation that the senior management and the board of directors receive remuneration. This is usually through salaries, bonuses, stock-based incentives among others.  Again, like other MNCs in the advanced economies, those in China also have a clear legal system which plays a very critical role in the operation of the firm. This protects the investor in all ways. It includes the law enforced to support the organization’s operation. They also have auditing system both internal auditors and the external auditors who play a vital role in helping to maintain the financial accountability and service standards of the MNCs. It is, therefore, clear that the corporate governance of MNCs in China is no difference from that of the advanced economies (Fan 2008, pp. 303-319).

Conclusions

In conclusion, corporate governance of the MNCs plays a big role in the success of these organizations. MNCs in advanced economies have mechanisms that help them operate in the business environment. They have characteristics and established methods related to the board of directors, senior management, their remuneration, ownership, audit system, financial management, legal issues handling and culture-based governance among others. All these work together for the successful business operation of the MNCs. China is also among the developed countries, and it is no exception from these governance systems. It has established management systems based on these principles.  It is, therefore, clear that the administration of the MNCs have a critical role in their success and this shows that those are chosen to serve on the board of directors, senior management or other executives should be people competent and people of admirable conduct and personal values.

 

References

Albu, N., Durica, A., Grigore, N., Grigoras, D., Mateescu, R., Ichim, A., (2013). Corporate Governance in Romania. Perceptions and Perspectives, Academy of Economic Studies Bucharest

Bjorkman, I., Budhwar, P., Smale, A. and Sumelius, J. (2008) Human resource management in foreign-owned subsidiaries: China versus India. International Journal of Human Resource Management 19 (5): pp 964–978.

Caldwell, C. and Xiong, J. (2010) Narrowing the gap – Developing Chinese talent to operate on a global level. EuroBiz

CIA (2008). "Appendix B. International Organizations and Groups.".  https://www.cia.gov/library/publications/the-world-factbook/appendix/appendix-b.html World Factbook.Retrieved on April 18, 2017

Clarke, Thomas (2007) "International Corporate Governance” London and New York: Routledge, ISBN 0-415-32309-6

Crawford, C. J. (2007). Compliance & Conviction: the evolution of enlightened corporate governance. Santa Clara, Calif: XCEO. ISBN 0-9769019-1-9 ISBN 978-0-9769019-1-4

De Pablos, P.O. and Lytras, M.D. (2008) Competencies and human resource management: Implications for organizational competitive advantage. Journal of Knowledge Management 12 pp 48–55.

Doob, Christopher M. (2013). Social Inequality and Social Stratification in US Society. Pearson Education Inc.

Edwards, T. (2011) The transfer of employment practices across borders in multinational companies. In: A. Harding and A.H. Pennington (eds.) International Human Resource Management. London: Sage, pp. 267–290.

Eun, Cheol S., Resnick, Bruce G. (2013). International Financial Management,6th Edition. Beijing Chengxin Weiye Printing Inc.

Fan, Y. (2008) "Country of origin, branding strategy and internationalisation: the case of Chinese piano companies," Journal of Chinese Economic and Business Studies, pp. 303-319, available at https://www.fenamsourcing.com/country-of-origin-branding-strategy-and-internationalisation-the-case-of-chinese-piano-companies/

Ghita, M., (2008). Corporate Governance, Bucuresti, Economic Publishing

Ionescu, A., (2010). Corporate governance in developed economies

Kay, John (2015), 'Shareholders think they own the company — they are wrong,' The Financial Times

Mingst, Karen A. (2014). Essentials of international relations. W. W. Norton & Company. pp. 310

Mingst, Karen A. (2014). Essentials of international relations. W. W. Norton & Company. pp. 310

Robert, Jochen, and Tydecks, Patrick (2007). Power and Ownership Structures among German Companies. A Network Analysis of Financial Linkages

Schermerhorn, John R. (2009). Exploring Management. John Wiley and Sons. pp. 387. ISBN 0-470-16964-8.

Sun, William (2009), How to Govern Corporations, So They Serve the Public Good: A Theory of Corporate Governance Emergence, New York: Edwin Mellen, ISBN 978-0-7734-3863-7.

Treanor, Jill (2009). "Rio Tinto confirms talks over Chinese cash

William Neuman (2013). "Hundreds in Peru Balk at Relocation From Site of Mine." The New York Times.

Wu, Zijing, Campbell, Matthew, Paton, James (2014). "Rio Tinto Rejected Takeover Approach From Glencore." Bloomberg News.

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