Agency Theory, Multinational Corporation, And Religiosity
2.1 Agency Theory, Multinational Corporation, and Religiosity
Over time, the raising issue on agency theory where conflict of interest between shareholders who act as the principal and managers who act as the agent has become a big research topic in corporate governance. Fama and Jensen (1983) argue within large and small organizations there is control instrument that deals with the agency problem caused by the separation of ownership and control. The same issue intensifies within multinational corporations (MNCs). Owners with limitation to fully control business activity located in different countries and the need of knowledge specific in that country or market require the headquarter (principal) to delegate their work to subsidiary’s managers …show more content…
(Leung et al. 2005). A finding by Harzing (2001) shows that headquarters’ national culture that have high uncertainty avoidance index as measured by Hofstede (1980) have a big tendency to control its subsidiaries. In the context of headquarters’ national culture, the author adopts a definition by Guiso et al. (2006. p.002) who define culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation”. Therefore, religiosity or culture has been proven to have a significant influence in the way headquartes control its subsidiaries.
2.2 Parent Country’s Religiosity and Subsidiary’s Supervisory Board
The role of supervisory board within corporation is first observed by Adam Smith in 1776 ( p.700) :
“The directors of [joint stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance [as owners] . . . . Negligence and profusion, therefore, must always prevail, more of less, in the management of the affairs of such a company ”
This view is followed by Berle and Means (1932, p. 87):
“Control will tend to be in the hands of those who select the proxy committee and by whom, the election of directors for ensuing period will be made. Since the proxy committee is appointed by the existing management, the latter can virtually …show more content…
Delegate to management. One of the most important jobs for board of directors is to delegate authority to management, and to monitor them. The focus of this job is to make sure that internal controls are effective. In order to do this, board of directors also have the right for hiring and firing management, especially the corporate executive officer (CEO). Hermalin and Weisbach (1998) find that the firm’s performance provides a signal of the CEO’s ability, therefore when the performance of CEO is not good, or significantly worse, the board will exercise the right to internally control by decreasing CEO’s freedom to manage or eventually take an action to change
Over time, the raising issue on agency theory where conflict of interest between shareholders who act as the principal and managers who act as the agent has become a big research topic in corporate governance. Fama and Jensen (1983) argue within large and small organizations there is control instrument that deals with the agency problem caused by the separation of ownership and control. The same issue intensifies within multinational corporations (MNCs). Owners with limitation to fully control business activity located in different countries and the need of knowledge specific in that country or market require the headquarter (principal) to delegate their work to subsidiary’s managers …show more content…
(Leung et al. 2005). A finding by Harzing (2001) shows that headquarters’ national culture that have high uncertainty avoidance index as measured by Hofstede (1980) have a big tendency to control its subsidiaries. In the context of headquarters’ national culture, the author adopts a definition by Guiso et al. (2006. p.002) who define culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation”. Therefore, religiosity or culture has been proven to have a significant influence in the way headquartes control its subsidiaries.
2.2 Parent Country’s Religiosity and Subsidiary’s Supervisory Board
The role of supervisory board within corporation is first observed by Adam Smith in 1776 ( p.700) :
“The directors of [joint stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance [as owners] . . . . Negligence and profusion, therefore, must always prevail, more of less, in the management of the affairs of such a company ”
This view is followed by Berle and Means (1932, p. 87):
“Control will tend to be in the hands of those who select the proxy committee and by whom, the election of directors for ensuing period will be made. Since the proxy committee is appointed by the existing management, the latter can virtually …show more content…
Delegate to management. One of the most important jobs for board of directors is to delegate authority to management, and to monitor them. The focus of this job is to make sure that internal controls are effective. In order to do this, board of directors also have the right for hiring and firing management, especially the corporate executive officer (CEO). Hermalin and Weisbach (1998) find that the firm’s performance provides a signal of the CEO’s ability, therefore when the performance of CEO is not good, or significantly worse, the board will exercise the right to internally control by decreasing CEO’s freedom to manage or eventually take an action to change