Foreign takeovers and corporate governance systems

1
Foreign take-overs and corporate governance
systems

• Main ideas and empirical evidence of dr.polit
  thesis
• Sverre J. Herstad
• Centre for technology, innovation and culture
• University of Oslo

2
Multinational/transnational corporate activity
imply

• the extension of the visible hand of managerial
  hiearchies from national economies to
  supranational regional and worldwide ones
  (Whitley 1999)
• Hence practices developed within national
  economies and embedded in the MNE as
  routines,practices, expectations and preferences
  are transfered to new contexts

3
The myth of the global corporation 1

• Doremus, Pauly and Reich (1998) Institutional
  structures of home base decisive influence on
  structure and strategy
• Fukao/Porter (1995/1994) Home corporate
  governance system decisive influence on structure
  and strategy
• Ruigrok and Van Tulder (1997) Bargaining
  relations of home base decisive influence on
  structure and strategy

4
The myth of the global corporation 2

• Whitley There is no coherent international
  system of co-ordination between owners/creditors
  and firms, between firms and labour or between
  firms themselves, but distinct national ones
• Hence the degree of standardisation of
  co-ordination processes and forms of economic
  organisation across national boundaries tends to
  be less than that within them (19994)

5
Which for us imply

• The concept of foreign ownership somewhat
  chaotic (Sayer 1984) if not specified beyond
  foreigness
• Foreign owners can be expected to diverge in
  structure, strategy, preferences and expectations
  based on their institutional origins and/or
  existing embeddedness in corporate governance
  systems
• Outcomes (brain gain or drain) can be expected to
  diverge accordingly (but not deterministically)

6
Corporate governance systems

• According to Porter (1994), Fukao (1995),
  Lazonick and OSullivan etc Strong relationship
  between external (national) and internal
  (organisational) systems of allocation,
  monitoring, evaluation and human resource
  management (HRM)
• Corporate governance system define what is
  considered sucess for a capitalist organisation,
  how this is supposed to be achieved and who is
  considered key knowledge actors in this process

7
Anglo-saxon corporate governance and MNEs
Distinct systems

• External system
• Fragmented pattern of ownership (no owners, just
  investors/agents of investors)
• Fluidity, easy entry-exit according to
  expecations of value apreciation
• Owner/agent focus neccessarily on short-term
  value apreciation of stocks
• Superficial proxy-based channels for monitoring,
  large information gap between owners/agents and
  business enterprise
• Owners/institutional agents have little influence
  over managers
• Labour markets Minimal institutional protection
  of workers

• Internal system
• Corporate goal Maximise shareholder value
  (quarter-to-quarter, year-to-year)
• Industry risk avoidance non-focused
  diversification
• Superficial proxy-based monitoring and evaluation
  (a number is a number)
• Financial competences dominate industrial
  competences in top management
• Top-down financal control over subsidiaries (
  strategic segmentation (Lazonick))
• Hire-and-fire approach to HRM individualistic

8
European corporate governance and MNEs
Increasing diversity but in general

• External system
• Concentrated ownership (ex Sweden Investor AB/
  AB Industrivärden), cross-shareholdings,
  proxy-voting system (Germany)
• Less focus on rapid entry/exit enable insider
  positions and insider knowledge and/or fixed
  cost investments in fundamental company
  research
• Owner influence over corporate strategy through
  voice rather than entry-exit in secondary
  markets
• In sum enable long term industrial rather than
  short-term financial ownership positions, with
  related knowledge accumulation by owners
• Labour markets strongly regulated

• Internal system
• Corporate goal Long-term survival
• Focused diversification, decentralisation of
  strategic decicion making ( strategic
  integration (Lazonick and OSullivan))
• Long-term strategic plans (technology-oriented)
• HRM policy reflecting medium-term fixed cost of
  labour

9
Case studies

• Subsidiary selection criteria
• Developer and producer of a physical investment
  or consumption good (not services)
• Exposure to international competition
• Established firm in established industry (no
  so-called new economy firms)
• Revealed strong (Porter) innovation based
  competitive advantages before takeover

• Cases (anonymous)
• 13 in total
• Four subsidiaries of british MNEs (of which one
  was formerly owned by german MNE)
• Four subsidiaries of US MNEs (of which one was
  formerly owned by German MNE)
• Three subsidiaries of swedish MNEs
• One subsidiary of Finish MNE
• One subsidiary of French MNE

10
Subsidiary product markets

• Mainly diversified quality producers
• Offshore energy systems
• Painting robots
• Fire warning and fighting systems
• Transportation
• Bicycles
• Airplane components
• Medical equipment
• Communication satelites
• Ship building/propulsion/naval equipment

11
Brain drain or gain 1 corporate governance

• British/US MNEs
• Focus on short-term profits inhibit long-term
  investments (knowledge, machinery and learning
  interfaces)
• Focus on control, transparency and individual
  responsibility inhibit collective learning
  (everybody must look out for themselves)
• Huge information gap translate into demand for
  transparency
• Cases of transfer pricing and ..company policy
  that core competencies are not to be controlled
  by subsidiaries
• Competition or distrust between units within MNE
  inhibit learning interfaces between them
• In sum Value extracting investment behaviour
  (Lazonick)

• European/japaneese model
• Industrial rather than financial goal, market
  shares important
• Information gap eliminated both by
  decentralisation and by investments in monitoring
  channels
• Financial enabling of cumulative,collective and
  uncertain competence building
• HRM Dedication of capital to workers create
  dedication of workers to capital (Asheim)
• Less focus on transparency and controlability
  enable learning interfaces
• In sum Value creating investment behaviour

12
Respondents (senior management/board members) are
saying that

• Brithish/american MNEs
• you can feel The City breathing down their back
  (subsidiary of British MNE)
• You only do what you are told, preferably in
  writing (subsidiary of British MNE)
• fail one quarter and you get a warning. Fail two
  and I will get fired, fail year-to-year and you
  are sold (local CEO of american subsidiary)
• We are not owned by an industrial enterprise,
  but a stockmarket-governed financial firm
  (subsidiary of american MNE)
• They are obsessed with counting everything. A
  number is a number, and you cant argue with them
  

• European MNEs
• They reflect german thoroughness in everything
  they do. We operate with strategy plans ranging
  up to ten years
• We have no difficulty financing investments we
  feel are necessary. As long as we show
  satsifactory long-term results, we operate with
  few or no financial restraints (subsidary of
  swedish MNE)
• They have been long-term solid owners, until
  they started focusing on shareholder value. After
  that it has been a nightmare, their expectations
  are completely unrealistic and I expect that we
  will be sold out as we cannot meet them (local
  CEO of french subsidiary

13
Brain drain or gain 2 learning interfaces

• British/american MNEs
• Few or no linkages to corporate RD resources
• Few or no learning interfaces towards other
  entities within MNE
• Why Non-focused diversification, financial
  restrictions as learning interfaces are costly to
  establish and maintain and difficult to monitor
  and control from above
• Cut-throat approach to supplier relationships
  necessiated by cost-cut requirements
• No room for trial and error!!

• European MNEs
• Selective trial and error linkages to corporate
  RD resources established
• Selective trial and error learning interfaces
  towards other entities within MNE
• Why Focused diversification within MNE, enabling
  role of finance, decentralised decicion making

14
No black and white picture because

• Different product markets are effectively served
  by different innovation strategies and hence
  organisational set-ups
• Porter US system overinvest (written early
  1990s...) in radical new technologies/ new
  markets, while underinvesting in the
  broad/systemic skill requirements of diversified
  quality production (Streeck 1992). Only the
  latter is illustrated in my phd work.
• US/GB system of financial capital (Perez 2002)
  and related HRM practices "...favours discrete,
  stand-alone investments that generate leaps in
  position over ongoing investments required to
  build capabilities..." (Porter 199462) new
  economy competitiveness

15
Reserach implications

• If firm level studies of foreign takeovers
  beyond pure descriptiveness
• Focus not on opposition national vs foreign
  ownership (chaotic), but on business system
  interfaces How do local practices and
  competences link up to strategic/financial
  preferences and HRM practices of MNE and how
  does the resulting structure enable the
  subsidiary to serve product markets in question?
• Hence focus not on firms themselves but on larger
  societal structures represented by those same
  firms (finance and HRM practices)
• Inherent danger in studies of foreign takeovers,
  with dangerours policy implications Cases of
  sucess/failure are identified, and this
  attributed to the foreignness of owner firm
  not to firm specific contingencies or other
  contingencies such as product markets,
  availability of distribution channels, market
  power etc
• Particularly dangerous when doing case studies,
  which MUST look beyond the individual owner firms
  to avoid concluding that good owners are good,
  bad owners are bad or even worse that good
  owners are good because they are foreign.