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Journal of Management Studies 48:2 March 2011

doi: 10.1111/j.1467-6486.2010.00921.x

Agency Perspectives on Corporate Governance of

Multinational Enterprises


Igor Filatotchev and Mike Wright

Cass Business School; Nottingham University Business School
abstract This paper argues for a greater focus on an agency theory (AT) perspective in
understanding corporate governance in multinational enterprises (MNEs) since, despite recent
developments, the traditional internalization theory approach limits our understanding of the
behaviour of these firms. We analyse the contribution of an AT perspective to understanding
various aspects of corporate governance in MNEs: internationalization, international joint
ventures (IJVs), headquarterssubsidiary relationships, and new forms of global business
groups. From this analysis, we suggest that even with the emerging AT literatures focus on the
role of ownership as a key governance factor, there is substantial need for research on several
key corporate governance mechanisms; namely, the role and nature of dominant owners, the
composition of boards of directors, the separation of CEOs and board chairs, executive
remuneration, and the role of the market for corporate control. There is scope to examine
further the implications of different institutional environments for AT perspectives on the
behaviour of MNEs.

The last decade has witnessed an explosion in both policy and research devoted to the
corporate governance of multinational enterprises (MNEs). Following these recent developments, Buckley and Strange (2010) argue that to the extent that the international
business (IB) literature has focused on governance issues, the emphasis has been on the
bureaucratic control of the allocation of production and distribution systems, generally
from an internalization theory (IT) perspective. Even so, there is a need to extend our
understanding of governance issues in MNEs to embrace strategy and knowledge dimensions together with contextual issues. More specifically, previous studies on governance
as a mechanism to minimize transaction costs should be extended to include behavioural
and strategic aspects associated with potential conflicts of interests among various stakeholder groups. Different knowledge and risk preferences of managers and stakeholders,
Address for reprints: Mike Wright, Centre for Management Buy-out Research, Nottingham University Business
School, Nottingham NG8 1BB, UK (
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I. Filatotchev and M. Wright

including shareholders, may lead to differences in their strategic objectives, leading to a

need for a governance contract to align their interests rather than simply governance
structures that minimize the costs of effecting a transaction. We argue therefore that
aside from the IT perspective, it is considerably important to adopt an agency theory
(AT) perspective that recognizes the key dimensions of corporate governance, notably
the role and nature of ownership, the composition of boards of directors, the separation
of CEOs and board chairs, executive remuneration, and the role of the market for
corporate control.
To develop this argument, we review a number of emergent AT-based perspectives
that are related to the complex interface between firm-level governance characteristics,
national institutional environments, and internationalization activities, each of which are
prominent considerations in the governance of MNEs. Specifically, we consider how
recent studies that focus on different corporate governance mechanisms at the firm level
and which take account of the influence of different institutional environments can shed
new light on several key aspects of the strategy and management of MNEs; notably,
foreign direct investment (FDI) strategies, control in international joint ventures (IJVs),
headquarterssubsidiary relationships, and new forms of global business groups.


Most of the empirical literature on corporate governance has its theoretical roots in AT,
and is concerned with linking different aspects of corporate governance with firm
performance. AT theorists argue that to constrain managerial opportunism and its
deleterious effects on performance, shareholders may use a range of corporate governance mechanisms, including monitoring by boards of directors (Fama and Jensen, 1983)
and large outside shareholders (Demsetz and Lehn, 1985). In addition, internal governance mechanisms may include equity-based managerial incentives that align the interests of agents and principals ( Jensen and Murphy, 1990), although high managerial
equity ownership can lead to entrenchment behaviour. Finally, external factors, such as
the threat of takeover, product competition, and managerial labour markets may constrain managerial opportunism (Shleifer and Vishny, 1997).
Previous studies have, nevertheless, generated an overly narrow perspective on corporate governance. Much attention in AT has been focused on large mature listed
corporations in the USA, concentrating on a static theorizing of the principalagent
perspective. Less attention has been paid to the change processes in governance and
variations in the principalagent relationship across national contexts. Within the AT
framework, the emphasis has been on the monitoring dimension of governance.
However, corporate governance is about both ensuring accountability of management
and enabling managerial entrepreneurship so that shareholders benefit from the upside
potential of firms (Filatotchev et al., 2006). Extant research has recently gone further to
understand the context in which the AT issues are forged. This research highlights the
role of institutional factors in shaping the complex inter-relationships between governance mechanisms and organizational decisions, including the decision to internationalize (Aguilera et al., 2008; Filatotchev et al., 2001). In the following sections, we discuss
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Agency Perspectives on Corporate Governance of MNEs


how an understanding of contextual effects can inform research on corporate governance of MNEs.


AT has a number of commonalities with IT (Table I). Both AT and IT recognize
conflicts in the goals of the contracting parties, acknowledge the importance of uncertainty and information asymmetries, and adopt an efficient-contracting orientation to
economic organization (Williamson, 1988, p. 569). But the two approaches differ in
important ways, notably in the basic unit of analysis and their assumptions about risk. IT
generally assumes risk neutrality, whilst AT explicitly assumes that the risk preferences of
MNE shareholders and managers, and of different groups of shareholders (e.g. the State,
family owners, and institutional investors), may vary, which may lead to different strategic objectives.
Differences in the basic unit of analysis are reflected in the costs which are then central
to the economizing problem. The relevant costs for IT are ex post, notably the transaction
costs of coordinating the activities of the various contracting parties. The relevant costs
for AT are the ex ante costs of crafting mechanisms to reconcile differing interests of
the parties. In short, the two perspectives are complementary. The objective of AT is the
design of a contract that optimizes alignment between principal and agent, whilst the
Table I. Key commonalities and differences between internalization theory and agency theory

Main concern
Unit of analysis

Behavioural assumptions

Organizational assumptions

Focal costs

Main predictions

Internalization theory

Agency theory

Governance structure
(Intermediate product) market
Adoption of efficient governance
structure that minimizes the
costs of transferring
intermediate products
Psychic distance

Incentive alignment
Adoption of contract which
optimizes the alignment of the
interests of the principal and
the agent
Bounded rationality
Variable risk preferences
Information asymmetries
Goal conflicts between
principals, and between
principals and agents
Ex ante costs of crafting
mechanisms to reconcile
interests of contracting parties
Firm strategy will reflect
different objectives and risk
propensities of contracting

Risk neutrality
Information asymmetries
Goal conflicts between parties to
Values of intermediate products
Ex post costs of coordination
under alternative governance
Firms will supercede markets to
effect exploitation of
intermediate products

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I. Filatotchev and M. Wright

objective of IT is the design of a governance structure which minimizes the costs of

effecting the transaction. These objectives are important to both the efficiency and
profitability of the MNE.
What significantly differentiates AT from the IT perspective on MNE governance is its
distinctive focus on behavioural aspects of the decision-making process within the MNE,
and between MNEs and their subsidiaries. This attention has laid the foundations for a
number of novel research streams in areas that have hitherto been the domain of IT. In
our arguments that follow in the next sections, we consider the main governance
mechanisms that have been applied to each IB theme. Table II summarizes the links
between the IB themes we consider and the related governance issues.
IT sees FDI primarily as a means by which firms can appropriate rents in overseas
markets from the exploitation of their idiosyncratic resources and capabilities. In such a
situation, an FDI reduces the transaction costs associated with coordinating activities
across national boundaries, as compared to a market-based exchange (Kogut and
Zander, 1993). An extensive literature has examined this core premise of IT by looking
at the firm-specific advantages possessed by firms that engage in foreign production, with
a primary contextual focus on firms from developed economies. Dunning and Lundan
(2008) identify a number of firm- and industry-level factors that may be positively
associated with a predilection for FDI, including firm size, operating experience, the
possession of proprietary resources, and product differentiation.
Recent studies have indicated, however, that internationalization strategies are also
associated with information asymmetries and substantial risks, especially when firms
invest in emerging markets with weakly developed legal and business environments. As
a result, specific FDI decisions may be related to risk preferences and decision-making
horizons of managers and other main shareholder constituencies, as suggested by AT
(Carpenter and Fredrickson, 2001; Hoskisson et al., 2002).
Previous studies in IB and strategic management fields see growth opportunities as
a driver of the choice to internationalize (Zahra et al., 2000). As Sapienza et al. (2006,
p. 920) suggest, internationalization influences the development of capabilities that give
the organization the flexibility to pursue opportunities for growth. Despite the complexities associated with globalization, previous research suggests that growth may
depend on an international presence (Carpenter and Fredrickson, 2001). An international presence provides new market opportunities in which the firm can sell product
innovations, as well as develop connections with important constituencies in diverse
markets, thus allowing them to obtain key resources economically (Zahra et al., 2000).
However, AT suggests that managers derive private benefits from international diversification that may exceed their private costs (Baker et al., 1988; Denis et al., 2002). Thus
managers may pursue international diversification, even if it reduces shareholder wealth.
Supporting evidence is provided by the value discount estimated in many event studies
of geographically-diversified firms ( Jiraporn et al., 2006). Therefore, internationalization
may be associated with a costbenefit trade-off, and corporate governance factors may
affect its specific organizational outcomes for the MNEs various stakeholders.
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New global
business groups



CEOChair duality

Executive remuneration






Specific governance mechanism

IB theme

Table II. International business themes and governance

Families and other block-holders

Heterogeneity of institutional investors
Foreign vs. domestic owners
Composition (executives vs.

Private equity
Sovereign wealth funds
Hedge funds
Active boards
Financial vs. strategic involvement
Skills to internationalize

Families and other block-holders

Shared visions of executives vs.
Dominance by major owners
Board processes
Full vs. partial foreign ownership
Involvement in control of decisions

Governance sub-mechanisms

Different influence of pressure resistant vs. pressure

sensitive investors to internationalization
Different attitudes of families and domestic
block-holders vs. foreign investors to
Attitudes of insider management to
Knowledge and skills in different board composition
Incentivization of top management team with range
of knowledge and skills
Insider ownership and pursuit of private gains from
Goal ambiguity/incongruence of different types
of IJV parties from different institutional contexts
IJV parties both principals and agents
Managers with local mandates may pursue own, not
firm interests
Effects of environment, firm complexity, ambiguity,
purpose of foreign subsidiaries on information
availability and processing, and on contract
Time horizon of investments/governance
Objectives of different types of new business groups
Effects of business groups strategy on governance
applied to portfolio companies

Governance issues

Agency Perspectives on Corporate Governance of MNEs


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Since the firms degree of internationalization is an important determinant of the

complexity it faces (Sanders and Carpenter, 1998), FDI strategy will depend on a firms
managements ability to deal with information asymmetries and the potential agency
conflicts associated with overseas ventures. As FDI decisions typically require high
levels of information and they occur with low frequency and high duration, these
conditions also likely contribute to agency problems (Michael and Pearce, 2004). The
agency framework relates these conflicts to adverse selection, moral hazard, and hold-up
problems (Williamson, 2002). Therefore, FDI decisions should also depend on the
governance characteristics of the MNE. However, the effects of the governance characteristics of the focal firm that undertakes FDI remain relatively unexplored. The limited
research that does exist has focused on ownership, boards and duality, and executive
One important aspect of the governance characteristics of a firm is the concentration
of ownership. Considerable research has focused on governance by dominant blockholders (highly concentrated shareholding), especially in emerging and less developed
economies (Claessens et al., 2000). Connelly et al.s. (2010) review suggests that shareholders with significant ownership have both incentives to monitor executives and the
influence to promote strategies they feel will be beneficial. In many transition economies
(emerging economies), family owners and other block-holders are an important governance constituency shaping strategic decisions, including internationalization (Douma
et al., 2006).
Within the AT perspective, institutional investors are the most important group of
shareholders for constraining agency problems. Studies of both developed and developing countries show that the presence of institutional investors promotes good governance
and significantly affects firms strategic choices (Filatotchev et al., 2001; Lien et al., 2005).
However, different types of institutional owners may have different impacts on firm
strategies, including internationalization (Hoskisson et al., 2002; Tihanyi et al., 2010),
and performance (Douma et al., 2006). Some scholars (e.g. David et al., 1998) differentiate between pressure-resistant and pressure-sensitive institutional investors and show
their different effects on strategic decisions. Pressure-resistant investors, such as foreign
financial institutions, are unlikely to have strong business links with their portfolio firms
and can have a strong influence on strategy choices (Hoskisson et al., 2002). In contrast,
pressure-sensitive investors, such as domestic financial institutions, likely have business
relationships with investee firms and often have an obligation to support managements
agendas (Tihanyi et al., 2010). Evidence from India (Douma et al., 2006) shows that
share ownership by domestic financial institutions has a negative impact on performance
compared to foreign institutional investors. In Asian economies, domestic financial
institutions are often related to controlling families through a complex web of informal
networks (Filatotchev et al., 2005), and are more likely to cooperate with families regarding strategic decisions. These arguments suggest that foreign institutional investors with
globally diversified portfolios and superior monitoring abilities are more likely to encourage high-risk, high-commitment FDI decisions by firms in emerging economies, whereas
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domestic institutions are more likely to form a coalition with risk-averse family blockholders and insiders in the parent company, supporting a low commitment entry mode.
Filatotchev et al. (2007) assess the impact of the extent of: (a) family ownership; (b)
non-family insider ownership; and (c) the presence of domestic and foreign institutional
shareholders on the entry mode decision for an FDI. Using a sample of Taiwanese
investors in China, they show that foreign investors are generally associated with high
commitment entry modes compared to domestic institutions. With the same sample,
Strange et al. (2009) show that shareholdings of controlling family, and of non-family
insiders, in the parent company, and parent shareholding in the Chinese affiliate, have
significant effects on the choice of location for a FDI. Therefore, the costbenefit
trade-off associated with internationalization decisions may be affected not only by
the firms ownership structure but also by the types of dominant owners. Moreover, the
organizational outcomes of the decisions of these owners may be contingent on the
institutional environments in which the MNE operates.
Boards and Duality
Consideration of the strategic decision to undertake an FDI often falls upon the board of
directors. Upper echelon theory suggests that board characteristics have a considerable
influence upon such strategic decisions, and upon corporate performance (Finkelstein
and Hambrick, 1996). Several studies have confirmed linkages between board composition and various strategic choices including acquisition, diversification, innovation, and
vertical integration (Hoskisson et al., 2002). Few such studies focus on the internationalization decision, although Filatotchev et al. (2001), using data on privatized firms in
Russia, Ukraine, and Belarus, showed that managerial ownership and board membership had negative effects on the adoption of export-facilitating strategies, and positive
effects on export-blocking strategies. They concluded that managers were exhibiting
risk-averse behaviour, and avoiding high levels of international commitment. Lien et al.
(2005) provide evidence that board size and the presence of independent directors
positively affects decisions to undertake FDI projects in Taiwan. In a Chinese context, Lu
et al. (2009) find that besides ownership concentration, the proportion of outside directors, and CEO shareholding all positively impact both export propensity and export
performance, the relationship being moderated by the firms home location level of
institutional development.
There is limited research on the role of CEOChair duality. Restrictions on CEO
Chair duality provide an additional means to prevent the deterrent to inappropriate
internationalization being undermined by dominant CEOs (Michael and Pearce, 2004).
Further research is needed on this issue, and while there is some research on the
important role of outsiders on boards and internationalization, there is little evidence on
the role of international experience by board members.
More generally, these research streams suggest that the effects of internationalization
on the firms performance and growth may be affected by a human factor associated
with the characteristics of key decision-makers in the MNE. For example, research by
Filatotchev et al. (2001) builds on the agency perspective, resource-based view, and
behaviour research, and analyses how executives characteristics and the distribution of
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power within the organization may influence not only the structural independence of the
board, but also cognitive capacity and incentives of independent directors. By building
on Hambrick and Masons (1984) emphasis on cognitive bases of powerful actors in the
organization (p. 193), future studies can make a contribution to IB research by linking
cognitive aspects of the executive team and internal balance of power with the development of a boards monitoring and resource/service abilities, and the corporate governance factors that are bound to provide an important impact on the organizations
internationalization strategy and outcomes.
Executive Remuneration
As we mentioned above, internationalization decisions may depend upon risk preferences of key stakeholders in the MNE. Executive remuneration plays an important role
too in addressing agency problems in an IB context. Tihanyi et al. (2010) show that
managerial contingent pay has a direct impact on international diversification, while
both contingent and non-contingent pay moderate the relationship between technical
competence and international diversification. Contingent pay provides an incentive for
managers to curtail the risk that international diversification to extend technological
competence may level off because of the possibility that they can obtain greater rewards.
The opposite would be the case for non-contingent pay. It is not that the international
diversification decision is more risky, but that managers perceptions change given the
type of incentive that is emphasized.
In an important governance finding, however, Carpenter and Sanders (2004) demonstrate that in the complex circumstances of internationalization it is important that
remuneration incentives focus on the top management team as a whole since this helps
ensure that the information processing capacity meets the demands of the internationalization context. As internationalization decisions are relatively low frequency, it may
be necessary to introduce constraints on managers strategic choices as an additional
mechanism to control agency problems (Michael and Pearce, 2004). However, the effects
of structure and characteristics of executive share-based compensation in the MNE still
remain unexplored, even though it provides a unique opportunity to study equity based
incentive pay schemes such as executive share options and long-term incentive plans at
a crucial time in a firms strategic development.
IT approaches to IJVs tend to assume that ownership equals control even though
dominant ownership may not bring control in certain host country environments and
minority equity holders may have effective control of certain activities within an IJV
(Makino and Beamish, 1998). Control may thus be exercised through other nonownership mechanisms (Madhok, 2006), such as where Buckley and Strange (2010) have
identified how trust can mitigate problems of coordination in IJVs.
Although IT has been a dominant paradigm in explaining control and governance
in IJVs, it does not necessarily provide an adequate explanation of factors influencing
the governance of IJVs. Agency problems at a firm level can offer additional insights as
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they call into question parent firm level benefits claimed for IJVs from an IT perspective
(Ramanathan et al., 1997; Reuer and Koza, 2000). Indeed, event studies of the
announcement of IJVs show negative abnormal returns, suggesting agency costs arising
from the problems of coordination of activities where the parties may have conflicting
objectives (Lee and Wyatt, 1990). Existing literature has focused on ownership and board
aspects of governance.
Parallel with literature that shows agency problems are associated with greater levels of
diversification, Reuer and Ragozzino (2006) find that firms with lower levels of insider
ownership develop IJVs more frequently, as managers seek private gains.
Within IJVs, horizontal agency problems arise as both parties are simultaneously
principals and agents. Conflicts of interest between IJV parties leads to opportunism and
this lack of goal alignment and self-interested behaviour creates agency problems.
However, in an international context, severe mismatches in the purpose of parent
corporations may engender incompatible approaches to corporate governance. For
example, while Anglo-American corporations likely pursue shareholder profit maximization objectives, they may partner overseas with business groups with pyramidal structures of inter-group block-holdings that entrench controlling family shareholders, whose
aim is to maximize the utility of the dominant ownership group. These two types of
corporations likely have different perspectives regarding the nature of agency problems
to be addressed. Anglo-American corporations focus on the divergence of managers and
shareholders interests (principalagent problems), while pyramidal business groups face
the problems of divergence of interests between dominant and minority principals
(principalprincipal agency problems). Perkins et al. (2008) show that IJVs between
Brazilian telecoms firms and partners from countries where business groups are rare
have significantly elevated failure rates, while IJVs with foreign partners from countries
where business groups are common are more likely to succeed.
Adoption of an AT perspective on IJV governance emphasizes the need to consider the
important role of boards in the governance IJVs. IJV board members play important
roles in investment decision making, strategic planning, monitoring performance,
recruitment of managers, maintaining relationships with IJV partners, and conflict
resolution (Bjorkman, 1995; Geringer and Hebert, 1989; Goodall and Warner, 2002), as
communication channels with parent corporations ( Kumar and Seth, 1998), and in
remuneration decisions (Yan and Gray, 1994). Board effectiveness may be limited if IJV
goals are ambiguous and the parties involved have different priorities and values
(Glaister, 1995). Parties with majority board membership, often alongside dominant IJV
ownership, can exercise greater bargaining power to attain their goals but this likely
negatively impacts alliance success and longevity ( Yan and Gray, 2001). Rather, the
development of a shared vision among board members, enhanced by the continuity of
board membership, is important in achieving good governance. Yet, IJV directors
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understanding of IJV governance and of the agendas of different IJV parties appears
limited (Petrovic et al., 2006). The evidence that board meetings in IJVs are relatively
infrequent (Goodall and Warner, 2002) poses problems for the development of trust and
resolution of conflicts, opportunism, and ambiguities. Hence, AT as a firm-level perspective provides important insights into the governance of IJVs, since it stresses the
design and monitoring of contracts that optimize alignment between the IJV parties, and
the IJV itself.


Research on international headquarterssubsidiary relationships is mainly associated
with the subsidiary mandate frameworks (Roth and Morrison, 1992), which suggests that
MNEs establish subsidiaries with various strategic mandates, which may include an
export mandate. As such, parental objectives have a dominant influence on a subsidiarys
operations, its decision-making processes, and its strategy within the MNEs global
production network (Roth and Morrison, 1992). However, the subsidiary may acquire or
develop unique resources and capabilities which impact its mandate (Birkinshaw and
Hood, 1998). Moreover, when a foreign subsidiary results from a full or partial acquisition of a local firm, its existing dynamic capabilities and knowledge may enable it to
identify new market opportunities. This often occurs when either the foreign investor did
not foresee new opportunities on entry, or their main objective was to provide funds for
restructuring and modernization undertaken by local management. Foreign-invested
firms can operate as relatively autonomous units influenced by their local environment
and thus they can constitute sources of local variation in the globalization process
(Geppert and Williams, 2006, p. 54). These arguments are particularly relevant in
transition economies where the mass privatization of state-owned firms, the liberalization
of FDI flows, and increasing integration with the European Union have created large
pools of foreign subsidiaries with diverse patterns of ownership and control, and which
are increasingly looking abroad for new market opportunities (Wright et al., 2005). As
Buckley and Strange (2010) recognize, however, individuals may favour the interests of
local subsidiaries rather than the overall interests of their firms. There is thus a need to
address these agency problems. Existing AT research has tended to focus on the ownership aspects of governance.
Several studies that have attempted to combine an agency perspective with strategic
management research (Filatotchev et al., 2001; Hitt et al., 1997) consider the development of a subsidiarys mandate as the outcome of a multi-dimensional strategic decisionmaking process on both MNE and subsidiary levels. Internationalization decisions in an
environment of economic and institutional change are associated with significant risks
(Peng, 2000). When foreign investors use a local firm to develop exporting within its own
vertical production network, there are additional risks in securing and enforcing contractual obligations such as timely deliveries and quality standards (Mudambi, 1999).
Studies on subsidiary mandates suggest that the international orientation of subsidiaries
may be linked to the local firms structural characteristics (Roth and Morrison, 1992). It
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may also depend on the foreign-invested firms governance factors such as the MNEs
ownership in the subsidiary and its forms of control over the subsidiarys decision-making
Following this line of research, several studies have identified two types of associations
between environmental dynamism, governance, and the content and context of business
strategy (Filatotchev et al., 2007; Hambrick et al., 1993; Sanders and Carpenter, 1998).
First, institutional upheavals and rapid change, such as what has been experienced in
transition economies, increase both top management team specialist knowledge and
the ambiguity surrounding managers actions (Peng, 2000). This produces a classic
principalagent problem between investors and the management of the subsidiary,
where outside shareholders are unable to observe and evaluate managers strategic
decisions and their outcomes. Second, economic and institutional transition increases the
complexity of transactions and affects the ways in which managers process information
when developing corporate strategy (Hoskisson et al., 2000). Thus transition may lead to
strategic errors even when managerial and shareholder interests are aligned (Hendry,
2002). These strategic errors are particularly harmful when investors use local firms as a
base for exporting to international customers or as suppliers to global production networks. Both AT and strategic management perspectives suggest that governance factors
such as ownership structure and investors direct involvement in decision-making should
have important impacts on the strategic decisions of subsidiaries.
New types of MNEs are emerging globally with important implications for AT perspectives regarding the governance of MNEs. These cross-border organizations are private
equity firms, sovereign wealth funds (SWFs), and hedge funds. As global investors they
are distinct from the MNEs studied in traditional IB research, yet these new types of
MNEs compete head-to-head with traditional MNEs to acquire companies. As such,
these cross-border organizations raise important issues concerning how they govern
themselves but crucially in relation to the governance of traditional manufacturing and
service organizations in which they invest. Existing research has focused on ownership
and board aspects of governance.
Private equity firms typically address agency issues in investee firms through concentrated ownership between themselves and management; detailed contractual specifications regarding the discretion of entrepreneurs, including the detailed provision of
financial information; and in the case of leveraged buyouts, the taking on of significant
amounts of debt (Cumming et al., 2007). In a cross-border context, the ability to engage
in monitoring that addresses agency problems may be heavily influenced by local
institutional regimes which mean that the contractual arrangements used to make
investments specifically developed in one country context are more or less fungible to
new contexts (Bottazzi et al., 2008; Meyer et al., 2009). For example, private equity
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investments are distinctive in their use of convertible financial instruments in the USA
and UK, where common law codes permit flexibility in the development of new financial
instruments, but this is not the case in civil code countries.
SWFs raise governance concerns as they may invest for strategic reasons rather than
economic reasons. SWFs generally purchase minority stakes directly from target companies and their equity acquisitions appear to be followed by deteriorating firm performance (Fotak et al., 2008).
In contrast to the performance effects associated with SWFs, hedge funds with a local
physical presence in the regions where they invest, which can provide a local information
advantage in their investment region, tend to outperform other hedge funds, especially
in emerging markets (Teo, 2009).
The distinguishing features of these three types of multinational organizations compared to more traditional MNEs concern, for example, their investment time horizons,
their relationships between their portfolio firms, and the frequency of their acquisition
activity, all of which may impact the nature of their governance role. Private equity funds
typically are limited life funds which need to exit their investments within about five years
(Cumming et al., 2007). Hedge funds may have a relatively short time horizon, while
SWFs are typically longer term investors (Fotak et al., 2008). Unlike divisions of MNEs,
portfolio companies tend to be viewed as individual firms with their own financing and
incentive structures. Although some traditional MNEs may be acquisition intensive,
acquisition activity followed by subsequent divestment is the rationale for these newer
types of MNEs. This activity likely leads to distinctive expertise in addressing agency
issues as firms are turned around, restructured, and developed for investment realization.
Along with concentrated ownership, private equity firms typically take an active board
presence, often nominating a non-executive chair and other non-executive directors.
The active board presence of international private equity firms extends beyond financial
monitoring to private equity firms, being a potential way to fill the resource gaps of
start-up and restructuring firms relating to the expertise they need for exporting. George
et al. (2005) find that internal owners tend to be risk averse and have a lower tendency
to increase the scale and scope of internationalization than do external owners such as
venture capital firms.
In contrast to this research on private equity firms, there is an absence of research
concerning the effects of SWFs on board involvement and the strategies of the firms in
which they invest. Further, unlike private equity firms, hedge funds rarely join the board
of directors (Dai, 2007). Yet, we know little about the governance role of hedge funds in
a cross-border context.
We have argued for the need to place a greater focus on an agency perspective to
understand corporate governance issues prevalent in MNEs. We have suggested that,
despite recent developments, the traditional IT approach limits our understanding of the
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Agency Perspectives on Corporate Governance of MNEs


behaviour of MNEs since it fails to take account of the different risk preferences of
managers and shareholders which may lead to differences in strategic objectives. Designing a governance contract to align interests of managers and shareholders rather than
simply developing governance structures that minimize the costs of effecting a transaction would seem to be important. Governance factors such as ownership structure and
types of dominant owners, board characteristics, and executive compensation may not
only have a significant impact on the internationalization strategies of MNEs, but also
substantively influence the performance outcomes of these strategic decisions.
Although recent studies are beginning to undertake empirical analyses of MNEs
within an AT framework, a clear articulation of agency mechanisms remains highly
limited. Much analysis hitherto has effectively extended the traditional role of ownership
in IT explanations into an AT context. Yet, as outlined here, corporate governance at
the firm level also concerns boards of directors, the separation of CEOs and board chairs,
and executive remuneration. That said, an examination of the role of boards and
executive remuneration from an AT perspective has been largely absent from studies of
headquarterssubsidiary relationships and to a lesser extent IJVs. There is hence a need
for further work on the structure and composition of IJV boards, the frequency and focus
of meetings, and the tenure and replacement of board members. With respect to private
equity firms, hedge funds, and SWFs, comparative research is needed to examine how
differences in their investment horizons and monitoring and acquisition expertise
compare to traditional MNEs and influence the ways in which agency issues are
There is also scope to examine further the implications of different institutional
environments for AT perspectives on the governance of MNEs. For example, the
functioning of boards in addressing problems may differ across institutional environments. In some contexts, it may be important to avoid conflicts and contentious issues
during formal board meetings but to address these through informal communication
(Bjorkman, 1995). Foreign partners from institutional contexts where this is not the case
may face major challenges in participating in such boards. Further research is needed to
examine whether and how boards and board members adapt in such circumstances.
Likewise, ownership concentration and the presence of dominant owners may be an
important monitoring factor that imposes controls over managerial discretion, but this
might only work well in institutional environments with high level of protection of
minority owners.
Clearly, this is a propitious time for a major surge in research that considers the broad
dimensions of corporate governance in MNEs from an AT perspective. We see such an
agenda as being complementary to the IT based agenda elaborated by Buckley and
Strange (2010), but also going beyond it. For example, Buckley and Strange (2010)
recognize that it may be difficult to motivate individuals to pursue the interests of the firm
as a whole since agency costs in MNEs are likely to be more substantial than in other
organizations. The mechanisms to address these issues, we have contended, are not
adequately addressed by IT approaches to governance.
In conclusion, our paper complements and further extends the research themes
outlined by Buckley and Strange (2010) by suggesting that, in the MNE context, corporate governance functions may go much beyond simply administrative routines aimed
2010 The Authors
Journal of Management Studies 2010 Blackwell Publishing Ltd and
Society for the Advancement of Management Studies


I. Filatotchev and M. Wright

at minimizing transaction costs within a complex web of transnational economic

exchanges. Corporate governance is at the heart of the strategic decision-making process
in the MNE, and, by affecting risk preferences and interest congruence among various
stakeholders, various constellations of governance factors such as ownership structure,
board characteristics, and incentive systems may have profound effects on the MNEs
global strategy, operations, and performance.

We extend thanks to Andrew Delios and Roger Strange for comments on earlier drafts.

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