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Lecture 2 International Trade

The document discusses several ways that multinational corporations can address agency problems between subsidiaries and parent corporations. It states that the parent corporation can clearly communicate goals to subsidiaries and oversee decisions to ensure alignment with the overall corporation's goals. It also discusses how corporate control mechanisms and laws like Sarbanes-Oxley can help address agency problems by improving transparency and accountability. Finally, it notes that centralized management can help reduce agency costs but may not utilize local knowledge, so some corporations balance centralized oversight with decentralized decision making.

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18 views

Lecture 2 International Trade

The document discusses several ways that multinational corporations can address agency problems between subsidiaries and parent corporations. It states that the parent corporation can clearly communicate goals to subsidiaries and oversee decisions to ensure alignment with the overall corporation's goals. It also discusses how corporate control mechanisms and laws like Sarbanes-Oxley can help address agency problems by improving transparency and accountability. Finally, it notes that centralized management can help reduce agency costs but may not utilize local knowledge, so some corporations balance centralized oversight with decentralized decision making.

Uploaded by

MOMNA IRFAN
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Parent Control of Agency Problems: The parent corporation of an MNC may be able to prevent most

agency problems with proper governance. The parent should clearly communicate the goals for each
subsidiary to ensure that all of them focus on maximizing the value of the MNC and not of their
respective subsidiaries. The parent can oversee subsidiary decisions to check whether each subsidiary’s
managers are satisfy ing the MNC’s goals. The parent also can implement compensation plans that
reward those managers who satisfy the MNC’s goals.

Corporate Control of Agency Problems: In some cases, agency problems can occur because the goals of
the entire management of the MNC are not focused on maxi mizing shareholder wealth. Various forms
of corporate control can help prevent these agency problems and thus induce managers to make
decisions that satisfy the MNC’s shareholders. If these managers make poor decisions that reduce the
MNC’s value, then another firm might acquire it at the lower price and hence would probably remove
the weak managers.

How SOX Improved Corporate Governance of MNCs: One limitation of the corporate control process is
that investors rely on reports by the firm’s own managers for information. If managers are serving
themselves rather than the investors, they may exaggerate their performance. There are many well-
known examples (such as Enron and WorldCom) in which large MNCs were able to alter their financial
reporting and hide problems from investors.

Enacted in 2002, the Sarbanes-Oxley Act (SOX) ensures a more transparent process for managers to
report on the productivity and financial condition of their firm. It requires firms to implement an internal
reporting process that can be easily monitored by executives and the board of directors. Some of the
common methods used by MNCs to improve their internal control process are:

■ establishing a centralized database of information,

■ ensuring that all data are reported consistently among subsidiaries,

■ implementing a system that automatically checks data for unusual discrepancies relative to norms,

■ speeding the process by which all departments and subsidiaries access needed data, and

■ making executives more accountable for financial statements by personally verifying their accuracy

Management Structure of an MNC: The magnitude of agency costs can vary with the MNC’s
management style. A centralized management style, can reduce agency costs because it allows managers
of the parent to control foreign subsidiaries and thus reduces the power of subsidiary managers.
However, the parent’s managers may make poor decisions for the subsidiary if they are less informed
than the subsidiary’s managers about its setting and financial characteristics. Given the clear trade-offs
between centralized and decentralized management styles, some MNCs attempt to achieve the
advantages of both. That is, they allow subsidiary managers to make the key decisions about their
respective operations while the par ent’s management monitors those decisions to ensure they are in
the MNC’s best interests.

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