Despite the growing importance and the current trend of a globalizing economy, relatively little is known about the roles and responsibilities of subsidiary board of directors and how they are influenced by various drivers. This thesis focuses on and investigates the roles and responsibilities of a subsidiary board and which firm-related (internal) and environmental-related(external) drivers could potentially influence these roles. From the existing literature on corporate governance four major roles are derived for the SB, namely a monitoring, advising, internal and external role. Qualitative data from 8 in-depth interviews with board members of a global subsidiary company provided a clear set of responsibilities in line with the four board roles. Furthermore, in this case firm growth, acquisitions and the organization at the parent level are seen as major internal drivers of board responsibilities. Economical downturn, industry changes and technological innovations are seen as critical external
drivers of board responsibilities in a subsidiary company. Additionally, this thesis shows that in times of economical recession the board tends take on a more
monitoring focused role. Smaller firms and acquisitions lead to a strong internal focus whereas the changes in the industry and a larger firm size result in more external
responsibilities. Finally, changes at the level of the parent and technological innovations lead to a more service or advising role of the board of directors in subsidiary boards. This thesis highlights the conditions under which the roles and responsibilities could change or shift and contributes to the literature as it presents
evidence that agency theory as well as resource dependence theory are relevant in the analysis of board responsibilities in subsidiary companies.
Table of Contents
1 Introduction
1.1 Problem Definition
1.2 Research Questions
1.3 Empirical Context
1.4 Contributions
1.5 Outline
2 Theoretical Framework
2.1 Board of Directors
2.1.1 Board Size
2.1.2 Board Composition and Structure
2.1.3 Board Roles and Responsibilities
2.2 Subsidiary Boards
2.2.1 Subsidiary Board Roles
2.2.2 Subsidiary Board Responsibilities
2.3 Determinants of board responsibilities
2.3.1 Industry Level Factors
2.3.2 Firm Level Factors
2.4 Research Questions and Conceptual Framework
3 Methods
3.1 Research Method: Case Study
3.2 Research Context
3.3 Research Design
3.3.1 Data Analysis
3.3.2 Data Collection
3.3.3 Triangulation of results
3.4 Validity and reliability of the study
3.4.1 Validity
3.4.2 Reliability
4 Findings
4.1 Board Roles and Responsibilities
4.1.1 Internal Role
4.1.2 External Role
4.1.3 Monitoring Role
4.1.4 Advising Role
4.2 Determinants of Board Roles and Responsibilities
4.2.1 Firm Size & Complexity
4.2.2 Acquisitions
4.2.3 Parent Organization
4.2.4 Economical Uncertainty
4.2.5 Industry Changes
4.2.6 Technology & Innovation
4.3 Summary of Research Results
4.4 Correlation with Theory
4.4.1 Firm level Characteristics
4.4.2 Environmental Uncertainty
5 Conclusion & Discussion
5.1 Contributions
5.2 Limitations
5.3 Future Research
References
1 Introduction
Often corporate boards are seen as a governance vehicle operating from a large distance from the day-to-day operating matter and therefore often difficult to observe (Adams, Hermalin & Weisbach 2008). However if things go wrong they are the responsible people to look at. Especially after several large fraud scandals at US firms like Enron and Worldcom, (inter)national regulators started to have a closer watch at the board of directors of corporate firms and boards became at the center of the policy debate about governance reform (Adams et al. 2008). The extra attention to boards of directors also led to an increased amount of academic research in this area.
The corporate governance literature has investigated various aspects like board composition and board structure of boards of directors in stand-alone companies (e.g. Boone et al. 2007; Adams, Hermalin & Weisbach 2008; Johnson, Daily & Ellstrand 1996; Zahra & Pierce 1989; Gillette et al. 2008 and more). However, as the larger proportion of the literature on boards focuses on corporate boards, there is far less attention paid to the management and control of subsidiary boards. A leading article by Leksell & Lindgren (1982) investigated the role of the board of directors in foreign subsidiaries. They identified three major roles for the subsidiary board, namely an internal role (monitoring and control), external role (advisory and external relations) and a legal role. In contrast, various articles found that some subsidiaries are only rubber stamps and are due to only perform local legal duties (e.g. Bjorkman 1994). In a more recent article, Du et al. (2011) looked at in which situations the foreign subsidiary is more likely to maintain an active board. Kriger (1988) examined the role of subsidiary boards (SBs) in MNCs and found evidence that SBs are perceived as more important and greater proactivity and that MNCs originating from different continents perceived the usefulness of SBs differently. As the literature on subsidiary boards is less extensive, unfortunately less is known about the roles and responsibilities of the board of directors in subsidiary companies compared to the literature on corporate boards’ roles and responsibilities. One of the major objectives of this thesis is to identify the core responsibilities of the board of directors of a subsidiary company and to answer the question what is the role of a board of directors in a subsidiary company ’? Furthermore, the literature suggests that differences in external factors like environmental uncertainty or cultural distance as well as internal factors like the growth of the firm causes fluctuations in monitoring costs and information needs of boards which could influence the boards’ roles and responsibilities. Therefore this thesis investigates how the roles and responsibilities of the board of directors at Lightspeed Research are influenced by various internal and external factors.
1.1 Problem Definition
Board of Directors is the focus of many academic studies in the field of corporate governance and strategic management. If you look at the primary functions of the board of directors of an organization, one can conclude that monitoring and advising the top management are its two critical functions (e.g. Coles, Daniel & Naveen 2007). Unfortunately there is far less attention for subsidiary boards (SBs) than there is for corporate board of directors and only a limited number of empirical research in the literature on corporate governance looked at the boards of directors in (wholly- owned) subsidiaries (e.g. foreign/oversees). Also the SB has monitoring and advising responsibilities but are slightly different than those of corporate boards (e.g. Leksell & Lindgren 1982; Huse & Rindova 2001). The board of the subsidiary has for instance more internal responsibilities than corporate boards. Previous research on corporate governance and board of directors suggests that the tasks and responsibilities of board of directors are influenced by various internal and external factors like e.g. firm size and scope (e.g. Boone et al. 2007; Reuer et al. 2010). This thesis would like to investigate the relationship between the various firm-related and industry-related drivers that could potentially influence the boards’ role and responsibilities. The lack of significant evidence in this area and the inconsistent findings related to the roles and responsibilities of the subsidiary board makes this thesis an interesting study.
1.2 Research Questions
In order to present an answer to the literature gap mentioned above, the main objective for this thesis is formulated as following: How do firm- and industry related characteristics influence the roles and responsibilities of boards of directors in subsidiary companies?
To support the main objective of this thesis and in order to investigate the relationship between the core responsibilities of the board and its determinants, the following (sub)research questions are formulated:
- Which roles and responsibilities can be identified for a subsidiary board of directors?
- What internal drivers could influence the boards’ roles and responsibilities?
- What external drivers could influence the boards’ roles and responsibilities?
1.3 Empirical Context
There has been done less research on board of directors in subsidiary companies. There are also limited studies focusing on board roles in subsidiaries. Furthermore there is also not much consistency in the way researchers qualify the description of a subsidiary company. For this inductive research a case study approach is adopted, which is a research strategy that focuses on exploring the dynamics present within single settings (Eisenhardt, 1989, 534). This research method enables me to further explore the different board responsibilities and the relationship to both internal as external factors that influence these responsibilities of the subsidiary board.
In this thesis, the specific case that is investigated is Lightspeed Research (LSR), a wholly-owned subsidiary of Kantar and WPP. LSR is operating in the dynamic and competitive online data collection panel business and has operating hubs in three regions, namely the Americas, Europe/Middle East/Africa and Asia-pacific. The case of LSR is interesting because its unique position as a global subsidiary company in a strong, competitive market and being part of a larger organization. The parent organization, WPP, is the largest marketing and advertising agency in the world and acts like a sort of holding company encompassing more than thousand subsidiary organizations around the world. Exactly those reasons as both being a global company and being part of a larger organization makes Lightspeed Research a unique organization to look at in this study. Additionally, LSR has a strong and very active board with all senior and highly qualified people who will enable me to answer the research questions formulated for this thesis.
In order to answer the research questions and explore the subsidiary boards’ roles and responsibilities in this case study, 8 in-depth interviews are conducted with the members of the board of Lightspeed Research. The 8 board members are all confronted with the duties of the board in their daily jobs and because of their seniority and previous experience on board level it will contribute significantly to the quality and reliability of this study. The empirical research for this thesis has been conducted in three different phases. To start with, an extensive literature review has been carried out to identify the existing theory and knowledge regarding this matter. The results of this review have been used in formatting the theoretical framework presented in this thesis. As a second step, the theoretical framework has formed the basis for the qualitative interviews that have been conducted at Lightspeed Research for this case study. Finally the results of the literature review and the qualitative interviews are further analyzed and compared which led to answers to the research questions that are formulated in this study and to the research propositions that are formulated accordingly.
1.4 Contributions
With the aim to explore the relationship between various drivers and the board roles and responsibilities of board of directors in subsidiary companies, I contribute to the existing literature on corporate governance and subsidiary boards. As mentioned earlier, the literature on subsidiary boards is limited in respect to board roles and responsibilities and this research project contributes to the theoretical understanding of the different dynamics that potentially could influence the subsidiary boards’ roles and responsibilities. Although the growing stream of literature on subsidiary boards and the roles of these boards (e.g. Leksell & Lindgren 1982; Kriger 1988; Huse & Rindova 2001; Du, Deloof & Jorissen 2011 and more), the literature still lacks consistent findings that explains the boards role and responsibilities and which factors determine the degree of these responsibilities. Results from this case study provide a clear set of responsibilities of the board and how these responsibilities are divided into an internal role, external role, monitoring role and advising role of the subsidiary board. Secondly, the results of this case study explored the conditions under which the set of responsibilities are reluctant to change and found several organizational-level and industry-level drivers that had direct influence on the boards’ responsibilities at the subsidiary company explored in this case study.
1.5 Outline
This thesis is carried according to the outline and structure provided by the university and literature on business research methods (e.g. Saunders et al. 2005). In the next chapter the results from the extensive literature review are presented. This chapter starts with some views on corporate board of directors in general and the roles and responsibilities of these corporate boards. Furthermore, existing theory on subsidiary boards is presented and again the roles and responsibilities are discussed. The final part of the theoretical framework introduces various determinants of boards of directors in subsidiary companies. In chapter four the appropriate method for the investigated research questions, which is a case study is further explained and motivated. The results of the qualitative interviews are discussed in light of the existing theory in chapter five. The final chapter of this thesis contains a conclusion and discussion of this study as well as the limitations to my research.
2 Theoretical Framework
A sound theoretical background is the basis for every single research and therefore in this chapter, the different concepts of main topic are introduced and a literature review is provided. In the first part, the relevant literature about board of directors is summarized and a more in-depth analysis of the tasks & responsibilities of these boards are presented. Thereafter an oversight is given about different perspectives of subsidiary boards that is the unit of analysis in this research. Furthermore, an essential part of this thesis helps to explain the underlying meanings of industry-level and firm- level factors that have influence on the boards’ tasks and responsibilities. This theoretical review provides the critical input for this research and forms the basis for the research questions posed in the final section of this chapter.
2.1 Board of Directors
Corporate boards of directors are the focus of many academic studies in the field of corporate finance, corporate governance and strategic management. Especially after large financial scandals like the Enron-fraud in the US, board of directors got more attention from large corporates, institutional investors and governments who issued specific recommendations about how boards should be structured and run (Boone et al. 2007). Many of these requirements are codified into laws and regulations like e.g. the Sarbanes-Oxley Act 2002. An important stream in the literature on board of directors focuses on the determinants of the board composition or structure (e.g. Boone et al. 2007; Lehn, Patro and Zhao 2004; Weisbach 1988; Linck et al. 2007; Dalton et al. 1998). Often studied topics in this area are for example the ratio insiders vs. outsiders and executives vs. non-executives. If the primary functions of a board of directors are considered, one can conclude that monitoring and advising the top management are its two critical functions (Coles, Daniel & Naveen 2007). Also the size of the board is a popular area of research and how this influences for example firm behavior (e.g. Lipton & Lorsch 1992; Goodstein et al. 1994). Another important area that is often studied in the light of board of directors are the roles and responsibilities of the board in corporate firms and in less proportion in subsidiary firms (e.g. Kriger 1988; Leksell & Lindgren 1982). As there is little consensus in the literature about board composition, board size and board responsibilities, these topics are further analyzed in the next three paragraphs.
2.1.1 Board Size
An often-reviewed element of a board of directors is the board size. However, a clear consensus seems to be lacking. Therefore, some leading views on board size are discussed below.
Lipton & Lorsch (1992) looked at the relationship between the size of the board and the monitoring role of the board. They found that smaller boards are more effective at monitoring than larger boards. According to them, smaller boards better cooperate, are more productive and are better coordinated and therefore are more effective in monitoring. On the other hand, larger boards are better in advising than smaller boards because they have more outsiders on the board and more shared knowledge (Dalton et al. 1999).
Dalton, Daily, Johnson & Ellstrand (1999) argued that the relationship between board size and firm performance is moderated by the firm size, the magnitude of this moderating effect is stronger in smaller firms. Another study found a negative correlation between t]he size of the board and firm performance for small firms and board in Finland (Eisenberg et al. 1997). They also found that firm size is strongly correlated to board size and its relationship to firm performance. Firm size is likely to influence firm performance through the ownership structure as in small firms managers and board members are often owners of the company (Eisenberg et al. 1997).
Firm size seems to be a very important moderating factor on board of directors. Goodstein, Gautam & Boeker (1994) found that larger boards are less likely to initiate strategic change especially during period of environmental uncertainty. Also firms with more diverse boards (composition) will be less involved in strategic changes. It is interesting to see that this correlation is strongly influences by firm size as more larger firms tend to be less involved in strategic change than smaller firms (Goodstein et al. 1994).
In the scholars on board size, in most cases the size of the board is investigated combined with board composition or structure as they are strongly correlated (Lehn et al. 2003; Goodstein et al. 1994; Boone et al. 2007 and more). Therefore in the next paragraph some leading literature on board composition and structure is presented.
2.1.2 Board Composition and Structure
The primary focus of scholars on board of directors has been on the structure or composition of boards. In many articles on board composition, the focus is on the determinants of board composition or structure (e.g. Lehn et al. 2003; Boone et al. 2007; Linck et al. 2008). Another important stream in the literature focuses on the number of inside versus outside directors in the board of directors and how this influences the board and/or organization (e.g. Gillette et al. 2008; Hermalin & Weisbach 1991; Eisenberg et al. 1997).
Two early studies, nowadays classics started the stream of literature on board composition. In the study of Vance (1964) was found that on average, inside focused boards performed better than outside boards. Pfeffer (1972; 1973) concluded that board compositions are organizational responses to the conditions of the external environment and are therefore exogenous. Harmalin & Weisbach (2001) noted that board structure is endogenous as firm performance affects structure just as structure affects firm performance.
In a recent study from Gillette et al. (2008) the board structure-performance relationship is experimentally examined. They focused on how board are structured and whether the number of insiders versus outsiders have influence on the board and firm performance. They further distinguished four different types of board structure. (1) Single-tiered boards have a mix of inside and outside directors who are responsible for both monitoring and advisory. (2) Two-tiered boards have a strict division between an insider managerial board and an outside advisory board (e.g. Germany). (3) Insider-controlled boards have a majority of inside directors and a minority of outside directors (e.g. UK). (4) Outsider-controlled boards have a majority representation of outside directors but also multiple inside directors (e.g. US). They further found that single-tiered boards with a majority of outside directors are most efficient in implementing institutionally preferred policies and that twotiered boards are more efficient than single-tiered boards with a minority representation of inside directors. However, they tend to be often rather conservative which leads to value destruction (Gillette et al. 2008).
The underlying idea is that boards are structured in order to maximize shareholder value. Boone et al. (2007) shows how organizational aspects and the costs of monitoring determine board composition. They found that if the firm grows, the boards are extended and more outside directors are added to the board. Furthermore, board independence decreases if the managers of the firm have substantial influence and little constraints on their influence.
Coles et al. (2008) found that larger, more complex firms have larger boards and therefore have greater advising requirements. This positively drives the number of outside directors in a board as they can offer specific valuable advice to the CEO and management of the firm. Also Lehn, Patro & Zhao (2004) underpinned firm size as an important determinant of board structure as it is negatively related insider representation.
Boards of directors are structured in a way consistent with the costs and benefits of its monitoring and advising tasks and roles (Linck et al. 2008). In contrast to the results of Boone et al. (2007) they found that boards tend be more independent when insiders see more private benefits and the influence of the CEO is greater. This relates to the two critical functions of the boards, advising and monitoring, and its costs and benefits accordingly. Insiders possess more firm-related information and are strong related to the CEO whereas outsiders provide more independent monitoring (Raheja 2005). Board structure is therefore strongly related to the costs of these two main functions and one may conclude that if the costs of monitoring increase (decrease), boards tend to do less (more) monitoring and therefore will have fewer (more) outsiders in the board (Linck et al. 2008). Rehaja (2005) found that effective boards have a higher proportion of inside directors in firms where costs of monitoring are high and where private benefits to insiders from inferior projects are low.
The research on the relationship between board composition and firm financial performance proves little consistency and resulted in mixed results. In an established scholar from Dalton, Daily, Ellstrand & Johnson (1998), they provide meta-analyses on 65 articles on this topic. Neither did they find strong significant evidence for a direct relationship between board composition and firm performance.
The general trend in board composition has been heavily influenced by recent regulatory mandates like the Sarbanes-Oxley Act (SOX) after the scandals at Enron and WorldCom. Especially for large firms, as their boards size was declining in the 1990s but started to increase again after the implementation of the SOX in 2002 (Linck et al. 2008). The most important consequence of the SOX-act is that board independence increased substantially to further enhance independent monitoring in order to avoid future scandals. Not only had these regulatory mandates influence on the board composition but also on specific tasks and roles of the board of directors, these are further described in the next paragraph.
2.1.3 Board Roles and Responsibilities
The literature on board roles and responsibilities is mainly characterized by the conceptual development of board roles based upon a range of organizational theories such as agency theory, resource-dependence theory, resource-based view and institutional theory (e.g. Dalton et al. 1999; Daily, Hillman and Dalziel 2003, Johnson et al. 1999; Zahra & Pearce 1989). In early work on boards of directors (Zahra & Pearce 1989), an analysis is drawn upon the different perspectives on the roles and duties of boards. They proposed four different roles namely, legalistic role, resource dependence role, class hegemony role and agency theory role. However not all roles found significant strong empirical support, but agency theory (monitoring managers for shareholders) is the most recognized perspective in research on corporate boards (Huse & Rindova 2001). After the classical article of Zahra & Pearce (1989), various scholars investigated these roles drawn upon the principles of their work. Boards of directors have multiple roles such as a monitoring (control) and advising role (service). However this dual role of the board as both an advisor and a monitor has some serious implications on the organization. Adams & Ferreira (2007) underpin this problem and found that the CEO faces a tradeoff in revealing information to the board members. If he discloses his information (as other board members are heavily dependent on his information) he gets better advice but more extensive monitoring. As a result of this, they found that the CEO would not communicate firm-specific information if the board were more independent. Therefore the dual role of the board may also conflict. Hillman & Dalziel (2003) have a slightly different view on the boards’ two critical tasks as they propose that the main functions are monitoring (agency theory) and providing resources (resource dependence theory). Hermalin & Weisbach (2003) suggest a slightly different view and found that boards of directors are involved in two main tasks, namely decision-making and strategy making. Mostly based upon the early work of Zahra & Pierce (1989), Johnson, Daily & Ellstrand (1996) have classified the boards’ tasks and responsibilities into three broadly defined roles, namely control, service and resource dependence role. These roles are further explained in the next paragraphs.
Control role: the board of directors’ critical function is monitoring of the firm management, which includes selecting, assessing and firing of top directors and management as well as looking after shareholders interests (Johnson et al. 1996). Since the board is responsible for major organizational and strategic issues, it is difficult to assess whether the directors remain independent and unbiased in monitoring and evaluating the firm. Therefore the proportion of outside directors (non management and no affiliation) is important as they are seen as more effective monitors of the management than insiders. This is mainly derived from their professional and personal independence from the CEO and their independent status (e.g. Johnson et al 1996; Adams et al. 2008; Zajac & Westphal 1996). Outside directors tend to rely solely on financial indicators due to the missing information from inside directors. This may lead to low risk diversification strategies by the CEO and the board because they are less able to estimate risky and justifiable strategic decisions (Eisenhardt 1989; Johnson et al. 1996). Directors who might be influenced by the CEO either professional, personal or economical may be less effective in monitoring the firm management (e.g. Baysinger 1985; Daily & Dalton 1994a). However, according to agency theorists, including inside directors provides the CEO considerable advantage as a result of information asymmetry as inside directors are able to provide valuable information and therefore provide an important internal monitoring role (e.g. Fama & Jensen 1983; Johnson et al. 1996). The monitoring or control role is derived from agency theory, where separation of ownership and control is critical and can lead to self-interested actions by the management (agents) at the costs of the shareholders (principals). Due to this fiduciary function, directors may face conflicts of interests between their legal task to effectively monitor the management and its professional and personal association with the management (Johnson et al. 1996). Therefore the board of directors functions from an agency theory perspective as a representative of the shareholders and monitors whether the management of the firm acts in their (shareholders) best interest (e.g. Eisenhardt 1989; Monks & Minnow 2008; Zahra & Pearce 1989). In the last decade, institutional investors and financial regulators like pensions funds or the FED have increased their presence and influence on the monitoring function of corporate firms to increase the independence and quality of monitoring by the board of directors (Linck et al. 2008; Johnson et al. 1996). The control or monitoring role includes various critical tasks such as monitoring and assessing the CEO, monitoring the firms’ financial and risk management processes, monitoring and assessing the firm management and monitoring the firms’ strategy and goals (Johnson et al. 1996; Business Roundtable 2010).
Service role: another major task of the corporate board of directors involves advising and supporting the CEO and top management of the firm on various organizational, administrative and managerial issues (Johnson et al. 1996). The service role also includes that directors are involved in initiation and development of the firms’ strategy (Lorsch & MacIver 1989). Prior research suggests that boards of directors are involved in the strategy formulation process (Judge and Zeithaml, 1992), are present in all stages of the strategic planning process (Tashakori and Boulton, 1983), and serve as sources of information for strategy formulation (Hermalin and Weisbach, 1988). Therefore the directors add value as they are seen as expert advisors all specialized in a certain field. Various other studies confirm this increasing amount of board involvement as they found that board of directors are more closely related to strategic decision making of the firm. Within the framework of the resource-based view, the board can be seen as an important strategic resource directly impacting firm performance. In this light, board members are considered as networking and legitimizing vehicles that are providing advice and information (Huse & Rindova 2001). Also the service role and therefore strategic decision making is strongly influenced by the board composition as board of directors with more outsiders will benefit from the more extensive and specialized knowledge and experience brought by the outside directors (Forbes & Milliken 1999). Additionally, Hoskisson et al. (2003) argued that inside directors tend to promote more internal innovation strategies, such as R&D, whereas outside directors have a tendency towards external innovation through acquisitions. Furthermore, several studies examined the role of contextual factors which may impact the service role of the board of directors. Daily & Dalton (1992; 1993) suggest that the advising role may be more important in smaller and entrepreneurial firms as those firms may benefit from the breadth of knowledge outside directors provide (Jonhson et al. 1996). Also Rosenstein et al. (1993) found that CEOs valued outside board members particularly during inception stage of the firm especially for their excellent information and expertise.
Resource dependence role: the board functions as a facilitator in acquiring the needed critical resources in order to secure the firms’ success. Boards of directors span the boundary between the firm and its environment and serves as a mechanism to extract resources (Huse & Rindova 2001; Pfeffer and Salancik, 1978). The firm could be interlocked to for example financial institutions through its members of the board, which provides the firm access to investment capital and financial information. It is therefore very important to carefully select the directors as they provide the firm direct or indirect access to critical resources like capital investment or governmental influence (Mizruchi & Stearns 1988). This unique position of the directors has two benefits, namely co-optation and connection (Huse & Rindova 2001). Whereas cooptation is a tactic to manage the interdependence between the board and its environment, connection refers to the ability of the directors to supply critical information and legitimate the firms’ actions in business and/or political communities (Huse & Rindova 2001). Several contextual factors moderate the influence of the resource-dependence role. Newly established firms tend to have fewer options for managing its resource dependencies as access to critical resources such as capital may be problematic. Therefore, small and entrepreneurial firms may benefit more from the appointment of a prestigious director as they tend to lack historical legitimacy and have fewer roots into local business and political communities (Johnson et al. 1996).
According to the Business Roundtable (2010), the paramount duty of the board of a public company is to select and oversee the CEO and to oversee firm management in their day-to-day operations. In both of these two main duties, the underlying functions of monitoring and advising are reckoned. The OECD (2004) also defined the responsibilities of a board. They find that boards should always function on a fully informed basis, with faith, diligence and good care. Furthermore they should apply high ethical standards and work in the interest of all stakeholders. In both papers an extensive number of specific oversight responsibilities for the CEO and firm management are presented. These tasks and responsibilities for boards of directors are illustrated in table 1.
Table 1: Tasks & Responsibilities for Board of Directors
illustration not visible in this excerpt
2.2 Subsidiary Boards
Unfortunately there is far less attention for subsidiary boards (SBs) than there is for corporate board of directors and only a limited number of empirical research in the literature on corporate governance looked at the boards of directors in (wholly- owned) subsidiaries (e.g. foreign/oversees). A subsidiary board is the board of a subsidiary company and often from a corporate perspective considered as a formal entity or management group. However, when dealing with regional or national
subsidiaries they are often used as advisory vehicles (Huse & Rindova 2001). The board of a subsidiary differs from group or corporate boards. Also here there is marginal consensus about the roles, tasks & responsibilities of boards in subsidiaries. In this section a detailed reflection is presented on the relatively small portion of established scholars on boards of directors in subsidiaries.
Subsidiary boards are established to bridge between the companies’ strategies and the local stakeholders and governments. SBs add value to the corporate firm by providing relevant strategic information and understanding of the local community (Bjorkman 1994; Huse & Rindova 2001). The subsidiary board can be either free-standing or linked to the corporate board (e.g. subsidiary CEO also in corporate board). The advantage of a free-standing SB is that monitoring and execution are separated, the downside is the information asymmetry. On the other hand, an advantage of linkages is that there is more equal information sharing between the two boards. Disadvantages are that strategy and execution got mixed and the responsible CEO of the SB is able to control the information that leads to the corporate board as he is member of that board and therefore have influence on its own examination (Strikwerda 2003).
Du, Deloof & Jorissen (2011) investigated the presence of active boards in foreign subsidiaries in 14 different countries. They found that a subsidiary board is more active if the subsidiary has worldwide responsibilities and performs a broad scope of added-value activities. Also when the subsidiary is relative large and local responsiveness is also high then SBs are more active.
2.2.1 Subsidiary Board Roles
The stream of research on subsidiaries took form from around the 1980s. In an early scholar from Hedlund (1980), an in-depth analysis is conducted on HQ-subsidiary relations in 27 subsidiaries of Swedish MNCs. He particularly looked at the role of the foreign subsidiary in decision-making and found that the companies left their subsidiaries with a great deal of autonomy. However, this amount of ‘freedom’ was not always perceived as positive as strategic conflict occurred because the subsidiaries were not involved enough in the companies’ strategic decision making.
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