Management Development Institute - Gurgaon Corporate Governance Corporate Governance Issues in MNCs

Group Roll No. No. 11PT1 - 008 11PT1 - 021 11PT1 - 023 1 11PT1 - 034 11PT1 - 043 11PT1 - 028 11PT1 - 032 Name Anirban Ghosh Aviral Vyas CR Suresh Harish Chand Gupta Kirti Sharma Dinesh Bhatia Guneet Saurabh

Post Graduate Programme in Management (Part time) (PT-PGPM: Apr 2011 Batch) Term: VI (Jul Sept, 2012)

Criticism of multinationals
MNCs are criticized for giving rise to huge merged conglomerations that:
Reduce competition and free enterprise

Raise capital in host countries but export the profits

Exploit countries for their natural resources Limit workers' wages Erode traditional cultures Challenge national sovereignty.

Entering countries that have low human rights or environmental standards.

Globalization Good or Bad?

Issue no.1 Deep discounts

Government Regulations in India Complying with laws MNCs have to operate thro subsidiaries which are not 100% owned by parent company. 1970s MNCs forced to issue shares to Indian public. Controls on pricing public issues at substantial discount to market price. 1990s Permitted higher foreign ownership. MNCs raised the foreign stake by issuing shares at very deep discounts @ large loss to minority shareholders (even at 1/10th of market rate). Net gain to foreign parent calculated after loss in 70s + Interest thereon on market rates >$ 200Mn. Parent Co being dominant share holder able to get resolutions passed with impressive majority.
Assault on share holder democracy

Issue no.2 Artificial low price

Foreign Parent Co having 2 subsidiaries in India in which one of which it holds a higher stake (100%) while in other it holds smaller stake (51%). The manner in which the MNC structures its business in India between these two subsidiaries is riddled with problems as far as minority stake holder is concerned. Allegation is the most profitable brands and businesses have been transferred from long established 51% subsidiary to the newly formed 100% subsidiary at artificially low prices. This implies a large loss to minority share holders of the 51% subsidiary who have contributed in equal measure to the investments that build the brand of their businesses to current dominant position.
Shifting of profitable business Loss to minority shareholders

Issue no.3 Demand for all the services

Parent companies increasingly demand for all the services that they provide to their subsidiaries. Start collecting royalties for the use of brand.
Principal market-India, Indian co assiduously built the brand through decades of advertizing paid for in part by the minority shareholders. Minorities watched in dismay as royalties knocked off sizeable chunk of the earnings of the company.

Siphoning of funds through royalty

Parent Vs Subsidiary companies conflict

1. 2. Agency relationship between CEO of conglomerate and managers of SBUs Framework Incongruent interests Agency relationship between Managers of HQs and managers of Subsidiaries- Incongruent interests due to different cultures & divergent backgrounds. The subsidiary managers in the HQs-Subsidiaries relationships are monitored and bonded via bundles of subsidiary specific corporate governance mechanisms, so that agency costs are minimized. Also, separate the ratification and monitoring of managerial decisions from their initiation and implementation. Mechanisms are both external (labour & product market) & Internal.(BOD, large outside shareholders, mutual monitoring of managers, managerial share ownership, managerial compensation packages & financial leverage. MNCs want high level of coordination & cooperation among their subsidiaries. Proper Incentive system to align interests

3.

4.

Agency problem Incongruence of Interests

Government & Public Policies

Corporate Governance has been gaining momentum across the world due to miserable corporate failures, unethical business practices and insufficient disclosure etc. Corporate Governance depends upon two factors. First is the commitment of the management for the principles of integrity and transparency in the business operations and the second are the legal and administrative framework created by the Govt.

Politics and government are poor examples of governance.

The government is a poor custodian of public assets. Issue and complexity in CG in India is also due to weak enforcement of CG regulations through Indian legal system Privatization/disinvestment of public sector and rapidly emerging private sectors with multinationals have resulted in poor state of affair. of domestic sector. Gap between Perception & Practicecooperative of Corporate Governance.

Adaption in India Culture

The Indian practice need not be completely different from the west, but has embedded cultural influence. India needs corporate governance culture based on its values Business history suggests that it often takes a scandal or two of unhealthy proportion to really bring into sharp relief the role of ethics and governance in business : Satyam debacle "People do not do certain things due to fear of law and if enforcement is good the fear of law is greater. Then there are also many things people do not do because of fear of God. There is a need to link the two together," said Massey.. Therefore Culture needs to have adherence to law and self -conscience Corporate governance in India derives significantly from Anglo-American experience, practice and literature. Indian CG codes based on the US and UK experience do not resolve specific governance issues plaguing Indian firms. In spite of best efforts to assimilate and apply international CG practices, the values embedded in our national culture have resulted in their desultory implementation CG is a multi-level, multi-tiered process, and is distilled from organization culture, policies, ethics and value of the people running the business

Culture of Politics, Corruption, Flattery, kya farak padta hai, chalta hai type attitude are major issues in Indian Culture

Regulation Compliance
Shareholder democracy Vs Rights of minority shareholders Tradeoff or Balancing? CG is contractual in nature. Each shareholder is entitled to a share in profits & assets of the company in proportion to his shareholding. Board & Management has fiduciary responsibility towards each & every shareholder & not just towards majority or dominant share holder. Shares are first & foremost ownership rights. Should regulators micromanage? Companies act-Protection of minority shareholders, Special majority, Information disclosure & audit, Securities law (SEBI regulations), Promoters contribution & lock-in, pricing preferential share allotment, Insider trading, Take-overs, Discipline of share market.
Share holders Ownership rights to profits & assets

Respond to market & competition issues

Maximizing profits, meeting customer demands, adapting to technological changes, trends & events of operating countries, Accountability, Transparency, Compliance to regulations Corporate governance is fundamental to changing the relationship between business and state in many emerging markets. By injecting transparency into the equation, corporate governance helps to remove cronyism, corporatism, and favoritism, instead facilitating an open exchange between the private sector and government.
Regulators & Capital markets should do macro management only

Ethics in the Business

There is no easy answer as to what is the best solution for good governance. But corporates should look for a balance between achieving necessary levels of accountability and ensuring that governance arrangements do no stifle flexibility, innovation and collaboration Business should facilitate institutional reform, reduce opportunities for corruption, increasing competitiveness, and promoting minority shareholders rights protection.

Wealth Earning & Wealth distribution in ethical way

Conclusion
Disclosure of information is the pre-requisite for the minority shareholders or for the capital market to act against the errant managements. The regulator can enhance the scope, frequency, quality & reliability of the information that is disclosed. Regulatory measures that promote an efficient market for corporate control would create an effective threat to some classes of dominant shareholders. Reforms in bankruptcy & related laws would bring in disciplining power of the debt holders to bear upon recalcitrant managements. Public sectors FIs are passive spectators (holds large block of shares). These shareholdings can be transferred to other investors who could exercise more effective discipline on the company management or restructured & privatized. Separation of Management & Ownership Requires Efficient & vibrant capital market, vigilant guardians for wealth they control

Thanks Q & A session

Theoretical Framework
Home Country Corporate Governance System

Cost-benefit Tradeoffs Among Corporate Governance Mechanisms

Host Country Corporate Governance System

Composition of the Subsidiary Bundle of Internal Corporate Governance Mechanisms

Firm Specific Factors that Represent Strategic, Environmental and Structural Contingencies

Control Potential of the Bundle of Monitoring and Bonding Mechanisms

Source: Prof. Costello, Illinois University

Predictor variables
Explanatory Variable Theoretical Rationale Type of Contingency Impact on Control Potential Impact on CostBenefit Tradeoffs Yes Home Country Corporate Governance System Host Country Corporate Governance System International Strategies: Positive agency theory Environmental contingency No

Positive agency theory

Environmental contingency No

Yes

International business literature

Strategic contingency

International Multi-domestic

Yes-Low control potential Yes-Moderate control potential Yes-High control potential Yes-High control potential Resource dependence literature Resource dependence literature Strategic contingency Yes-High control potential

No Yes

Global Transnational Subsidiarys Importance Subsidiarys Resource Dependence on Local Elements Environmental Uncertainty Subsidiarys Industry Subsidiarys Size Subsidiarys Age

Yes Yes No

Strategic contingency

No

Yes

Positive agency theory Positive agency theory Positive agency theory Positive agency theory

Environmental contingency Yes-High control potential Environmental contingency No Structural contingency Structural contingency No No

No Yes Yes Yes

Source: Prof. Costello, Illinois University

MSIL Share holding pattern & subsidiaries