STAKEHOLDER EXPECTATIONS & SUBSIDIARY GOVERNANCE
It is often a misconception that ‘Governance’ is something
we can adopt or ignore. The reality is that we all do
‘Governance’, even in our personal lives. The question
should be how well we do it.
The issue is that since the term ‘corporate governance’
was coined by Bob Tricker, in his book ‘Corporate
Governance’, in 1984, it seems that everyone who has
written about corporate governance has developed their
own definition. Rather than clarifying what corporate
governance is this has led to more and more confusion
over what corporate governance means. It has also led
to problems for well meaning multinational companies
as they can find themselves trying to comply with many
differing and sometimes conflicting laws, regulations,
standards and codes of corporate governance across the
many countries in which they operate.
The origin of the word ‘governance’ appears to be in
Geoffrey Chaucer ‘s ‘The Canterbury Tales’ which was
written at the end of the 14th century. In the Clerk’s
Tale, the clerk is asked by the host to tell a merry tale.
The clerk replies, that the host has the ‘governance over
the company’ i.e. is in charge of the group, and so he will
do as requested. Governance therefore appears to mean
how a group of people are regulated or their behaviour
controlled to achieve the optimum outcome. If we take
this definition back into the corporate world it should
mean effective leadership to create sustainable value
whether this is for their shareholders or a wider group
of stakeholders. In many parts of the world there is also
now a growing expectation that this includes being a good
corporate citizen.
This interpretation of corporate governance is far more
than compliance with a set of laws, regulations, standards
or codes which is what corporate governance in many
countries seems to have become. It is about building an
infrastructure to regulate and control behaviour within
an organisation to create effective leadership and create
sustainable value. This is difficult to accomplish in a
single organisation in the case of subsidiary governance
multinationals are looking to do it across a multitude of
companies and countries.
Before I look at what multinationals should consider
when developing good subsidiary governance I would
like to tell two stories which highlight issues surrounding
subsidiary governance.
The first involves a joint venture in sub-Saharan Africa
between a multinational company and a local company
involved in the tobacco industry. The Managing Director of
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the JV is an expat appointed by the multinational company.
The JV is a registered company in the sub-Saharan African
country and has a Board of Directors. The Managing
Director received an instruction through the management
line from the head office of the multinational to change
the way tobacco was purchased from the out growers.
The Managing Director implemented the instruction
without consulting the Board of the JV. This action not
only brought an end to the JV but also nearly destroyed
the tobacco industry in the sub-Saharan Africa country
where it was the main source of income for many people
living in the country.
The second story involves a multinational company
wanting to grant share awards to its senior managers
across the globe. Due to a change in transfer pricing
regulations to avoid the cost of the awards being taken
into the books of the parent company, the Head Office
Corporate Secretarial function was asked to organise
for the Boards of each subsidiary company who had
an individual eligible for an award to pass a resolution
granting the award to that individual. It seemed a straight
forward request. In practice it was anything but. The Head
Office Corporate Secretarial function soon found that
many of the subsidiary companies had active Board’s with
non-executive directors on them who were not prepared
due to their own corporate governance regulations
to simply rubber stamp a request from head office.
The individual’s performance did not stack up against
comparator performance in the country, something
that had not been taken into consideration in granting
the global awards. This in turn led to HR issues for the
multinational as expats did not want to take up positions
in those countries where it was perceived to be difficult
to get awards.
The lessons from both of these stories are:
Firstly, an assumption that an instruction from head office
should be/would be followed without question.
Secondly, local managers following instructions from their
regional line managers without consulting the local Board.
Thirdly, a lack of knowledge by the Head Office decision
makers of local conditions and environment.
Fourthly, a lack of awareness and perhaps respect of local
corporate governance requirements by the Head Office.
Another aspect to subsidiary governance is where a
multinational purposely does not implement the level of
Stakeholder Expectations & Subsidiary Governance
Article by Alison Dillon Kibirige
9/19/13 10:07 AM