CORPORATE GOVERNANCE OF LISTED SUBSIDIARIES: PRINCIPAL-PRINCIPAL CHALLENGES FOR MULTINATIONAL ENTERPRISES IN EMERGING MARKETS

Abstract

Purpose – This paper aims to expand our understanding of the principal-principal (P-P) conflicts that can arise when multinational enterprises (MNEs) have subsidiaries listed in emerging markets. By identifying common contexts and actors involved in these conflicts and applying a systems theory lens, it furthers our understanding of how P-P conflicts arise and how they can be mitigated. Design/methodology/approach – Ten MNEs and their 32 majority-owned subsidiaries listed on stock exchanges in Asia and Africa are investigated through qualitative case studies of P-P conflict events reported in the media. Archival materials are the main source of data with findings sense-checked through interviews with local governance experts. Findings – The paper reveals four situations where P-P conflicts between MNEs and local shareholders commonly arise: buy-outs, related party transactions, restructurings and decisions that create intra- group competition. It also identifies four groups of governance actors involved in P-P conflicts: market analysts; regulators; shareholder groups; and boards of directors. It shows that P-P conflicts are mitigated by information exchange – feedback loops facilitated by these actors help to resolve information asymmetries. Practical implications – The findings of the paper have implications for both policy-makers and investors in emerging markets. Policy makers should consider how information exchange can be encouraged in each of the common contexts for P-P conflicts by requiring disclosure and facilitating shareholder engagement. Investors can gain confidence in markets with a culture of shareholder activism and a strong financial media which can offset weaknesses in legal institutions. Originality/value – The paper argues that the transnational complexities involved when an MNC has a listed subsidiary in an emerging market call for a systems theory approach to understanding corporate governance. Systems theory has not previously been applied to P-P conflicts yet provides a promising way to take into account the interactions between national governance bundles and the role of both formal and informal mechanisms in mitigating or resolving P-P conflicts.