In an effort to maintain standards that form the basis of their competitive advantage, multinational firms have a set of standard operating procedures that apply across the global organization. Indeed, business success often depends on globally integrated operations – including marketing, production, research and development as well as human resources management. A major challenge in global operations, which have much more complexity and uncertainty than domestic ones, is to strike the balance between empowerment and control, to enable adaptation and responsiveness to overseas markets with minimal risk.
Global companies face decisions as to what extent processes should be standardized or made flexible, and how to guard against the risk of too much flexibility in the process of internationalizing best practice. Multinationals are forced to maintain a constant balance between being “global” and “local” and having to deal with a myriad of pressures in this regard. Pressure is exerted on these firms to adopt local practices that cause them to conform within the institutional context of the host country. At the same time, in order to maintain their competitive advantages, they are forced to adopt the same organizational practices as all the other subsidiaries around the world.
There is always an ongoing attempt to maintain sufficient control over the global organization while empowering the local Board of Directors.
In Nigeria as in many countries, foreign subsidiaries are required to have Boards of Directors. Given the importance of foreign subsidiaries in the operation of multinationals and the complexities of managing geographically dispersed and culturally distant foreign subsidiaries, one would expect multinational firms to use subsidiary Boards strategically to govern foreign subsidiaries. However, in practice some subsidiary Boards are only set up to fulfill local legal requirements.
Typically, multinational firms have a unified corporate strategy defined by the overall governing body, operating out of the global headquarters. Each local subsidiary is then expected to adopt and implement the strategy as defined. As firms find themselves expanding beyond regional boundaries, the realities of local variables that could impact on global strategies are becoming more apparent. These include host country risk (political, social and environmental risks) cultural differences and competition intensity.
Given that multinationals increasingly compete against one another in multiple markets where the strategic actions taken by a multinational in one market can have repercussions in other markets, it follows that they may well be inclined to exercise a high level of control over foreign operations. Significant control enhances a multinational’s ability to ensure that strategic actions taken by a subsidiary in one market do not produce negative results in other markets above and beyond the expected gains to be made by a focal subsidiary’s strategic move.
What then is the role of the local Board in defining and articulating strategy as required by the various Codes of Corporate Governance? Are local Boards of multinational firms sufficiently empowered to tweak the firm’s global strategy in sync with local realities? It is suggested that an appropriate balance can be achieved that would give sufficient autonomy to the local Board to adapt to local realities, whilst keeping sight of the global strategy.
Another area that poses a dilemma for and tends to erode the authority of the local Board of Directors is with respect to reporting and performance measurement. Executives of multinational organizations would typically have functional reporting lines that require them to report to the headquarters. Furthermore, Key Performance Indicators are usually set by the headquarters. Consequently, performance appraisal is the responsibility of the functional heads, rather than that of the local Board. The effectiveness of the local Board can be further diminished where the subsidiary CEO holds a management position in the global headquarters.
Given the far reaching responsibilities imposed by company law on Directors, it is imperative that the Board of a local subsidiary be sufficiently active to deal with the peculiarities of the local operating environment. There has to be a tradeoff as well as a costs/ benefits analysis of exercising control and granting substantial autonomy to the local Board.
Finally it is suggested that regulators need to pay closer attention to the complexity of multinational organizations and develop regulations that emphasize the importance of subsidiary Boards in the oversight of foreign subsidiaries.