ffff

1. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Studies on International Corporate Governance Practices • Board of Directors - Denis and McConnell (2003) • U.S. – main goal is to protect shareholder interests • Europe – most countries do not have laws governing the role of the board of directors • Some have two-tiered boards, as in Germany • Japan – appoint outside directors when in trouble • Use banks for the role of outside governance • Russia – insiders control the board

2. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Studies on International Corporate Governance Practices • Board of Directors – Denis and McConnell (2003) • Higher proportion of outside directors does not mean higher profitability • Higher proportion of outside directors positively impacts decisions concerning • Acquisitions • Executive compensation • CEO turnover • Board size is negatively related to • Firm performance • Quality of decision making • Independent directors are more likely to fire management

3. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Studies on International Corporate Governance Practices • Executive Compensation • Goal is to align management’s goals with investors’ goals • U.S. studies have shown that sensitivity of pay to performance has increased over time • Stock options are the fastest growing type of executive compensation in the U.S. • Japan and Spain are following suit

4. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Studies on International Corporate Governance Practices • Ownership Structure • Market-centered economies – U.S. and U.K. • Ownership tends to be dispersed • Bank-centered economies – Japan and Germany • Ownership tends to be concentrated • Outside of the U.S., concentrated ownership indicates positive firm performance • Study of East Asian countries revealed a positive relationship between government and bank ownership and firm performance • Privitization of business has a positive effect on profitability

5. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Studies on International Corporate Governance Practices • The External Control Market • A hostile takeover occurs when a firm is purchased without soliciting bids • U.S. has the most active market • Example – Molson and Coors • U.K. also has an active takeover market • External market has not been shown to be a common governance control tool

6. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Studies on International Corporate Governance Practices • The Legal System • Preference for concentrated ownership can be explained by legal system (La Porta et al. 1998) • Common law system – U.S. and U.K. • Provide strongest degree of protection for shareholders • Tend to have more dispersed ownership • Three largest shareholders own 20% of the firm • Civil law system – France and Germany • Provide the least amount of protection for shareholders • Tend to have more concentrated ownership • Three largest shareholders own 45% of the firm • “If the law does not protect the owners from the controllers, the owners will seek to be controllers.” (Denis and McConnell 2003)

7. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Cross National Differences in Corporate Governance

8. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Cross National Differences in Corporate Governance - Capital • Refers to the shareholders or owners • Shareholders exercise control in 2 ways • Commitment – length of holding shares • Liquidity – active buying and selling of shares

9. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Cross National Differences in Corporate Governance - Capital • Three Factors of Shareholder Control • Property Rights • In countries that favor large shareholders, owners tend to exercise control through commitment • Example – Japan’s property rights favor banks • U.S. laws tend to favor small shareholders, who exercise control through liquidity • Financial System • Bank-based system – commitment (Germany) • Market-based system – liquidity (U.S.) • Interfirm Networks • Japan and Europe have these; tendency toward commitment • U.K. – tendency toward liquidity

10. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Cross National Differences in Corporate Governance - Labor • Influence exercised by employees depends on three factors • Representation rights • Strong representation = internal participation • European countries have strong representation • Union organization • Class-based and craft-based unionism = external participation • Enterprise-based unionism = internal participation • Skills formation • Portable skills = external participation (U.S.) • Firm-based skills = internal participation (Japan)

11. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Cross National Differences in Corporate Governance - Management • Ideology • General knowledge and hierarchical decisions • U.S. and France – finance focus • Scientific specialization and consensual decisions • Greater commitment to the firm (Germany) • Career Formation • Closed managerial labor markets (Japan) • Greater commitment to the firm/very specialized • Open managerial labor markets (U.S.) • Less commitment to one firm/more autonomy

12. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Internal Controls • COSO Framework • Control Environment – control consciousness of the people • Risk Assessment – risk management of all sources of risk • Control Activities – policies and procedures • Information and Communication – communicating significant information to the right functions • Monitoring – assessment of system performance over time

13. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black The Sarbanes-Oxley Act of 2002 • Section 404 • Establishes management’s responsibility for internal controls • Management must assess controls annually • Management’s assessment must be assessed by an independent auditor • Effective November 15, 2004 • Foreign firms listing in the U.S. – July 15, 2005

14. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black The Sarbanes-Oxley Act of 2002 • Cost of compliance is tremendous! • E&Y showed that large U.S. firms would spend more than 100,000 hours to comply with 404 • Foreign listings on NYSE are decreasing • Large new listings have not declined • Some say increased transparency is an advantage to firms • Countries must be compliant in all countries of operation

15. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black The Role of Information Technology in MNEs • I.T. is now a key strategic function in firms • Enterprise Resource Planning (ERP) has helped to link departments and functions into one system

16. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Problems of ERP include Training costs Integration and testing Consulting fees The Role of Information Technology in MNEs • Advantages of ERP include • Integration of customer order information • Reduction in inventory

17. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Theories and Realities of Global Information Processing • Egelhoff’s (1991) 4 dimensions of processing • Routine – inputs are frequent and homogeneous • Nonroutine – info is unique and infrequent • Sequential – info flows in a predetermined direction • Reciprocal – info flows in a manner not previously determined

18. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Theories and Realities of Global Information Processing • Accounting info for MNEs tends to be routine and sequential • Accounting info must have extensive reach • Internationally, the key is to determine how to share information across organizational lines

19. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black MNEs and Transborder Data Flows • Management of info is as important as management of assets and production • Some countries have legislation affecting transborder data flows • Concerns over transborder data include • Employee information • Industrial espionage involving data piracy • Political espionage • Theft of industrial properties and designs • Fiber optics are improving data flow worldwide

20. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Final Thoughts on MIS and Strategy • Firms with a multi-domestic approach do not integrate as much as firms with a global orientation • MNEs that follow the transnational model tend to be more interactive • These MNEs will be more reciprocal than sequential in data flow

21. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Knowledge Flows in MNEs

22. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Final Thoughts on MIS and Strategy • Mirchandani and Lederer (2004) found that the systems function is treated differently than traditional functions (marketing, finance, manufacturing) • MNEs may want less autonomy in systems to ensure compatibility among systems • MNEs are concerned with data security, so systems design may be less autonomous

23. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black Centralization, Strategy, and the Accounting Function • The degree of centralization may affect the nature of the accounting control function • MNEs need to implement a system that provides flows of information between all combinations of affiliates and parents • This needed system is not highly decentralized or centralized • Record-keeping is often complex, but can be controlled by the parent company • Example – Coke and its policy manuals

24. International Accounting & Multinational Enterprises – Chapter 12 – Radebaugh, Gray, Black The Use of Internal Controls • 3 methods used to develop a global orientation are • Develop and communicate a clear and consistent corporate vision • Manage human resource tools effectively • Integrate individual thinking and activities into the broad corporate agenda by means of co-option (developing a more global perspective) • Accountants must have a global vision