How Does Corporate Governance Affect Internationalization, Globalization of Australian Firms - Research Paper Example

How does Corporate Governance affect internationalization, globalization and performance of Australian firms in manufacturing industry? Introduction Corporate governance is generally, a set of policies, laws, institutions, processes, and customs, which affect the way a corporation or a given company is administered, controlled or directed (Clarke 2004, p.265-301). Corporate governance in particular also encompasses the relationships among the numerous stakeholder involved and the objectives or goals for which that given corporation is governed. The principal stakeholder of the corporate governance is the board of directors, shareholders, employees, creditors, suppliers, customers, and the community largely. Corporate governance is taken to be a multifaceted subject in general. A critical theme of corporate governance is ensuring the accountability of particular, individuals within a given organization using mechanisms, which try to eliminate or reduce the principal-agent problem (Shleifer and Vishny 1997, p. 737-783). A related thread of discussions though separate focuses on the influence that the corporate governance system has in economic efficiency, strongly emphasizing on shareholders' welfare. There are yet other elements to the subject of corporate governance, for example, the stakeholder view and models of corporate governance worldwide. The corporate governance definition has broadened and evolved over the years encompassing the whole process of facilitating the activities of a company and serving the interests of the company shareholders in conformity with the ethic of the land and the laws (Berglof 1997, p. 93-123). While corporations endure criticisms regarding their governance practices since the 1970s, it is noted that some governance systems for numerous companies were established by mid 1990s (Clarke & Rama 2008, p.12-36). Background It is worth noting that the Australian firms in manufacturing industry are subject to corporate governance and it developments over years (Shleifer and Vishny 1997, p. 737-783). On the same note, the firms experience issues to do with globalization and internationalization in their operations especially in such situations where the world is becoming global. These aspects affect the organizations’ operations therefore; have an impact on corporate governance of the organizations stretching to the performance of the overall organization including its achievement of objectives and goals as structured. One overriding corporate governance mechanism for Australian firms in handling issues of global expansion and internationalization and improving the firms’ performance has been using outside directors (Clarke 2004, p.265-301). Given the institutional context of a developed economy of the country, as well as high competition from other manufacturing firms in other countries, outside directors have been playing strong roles in controlling and monitoring the same (Berglof 1997, p. 93-123). The outside directors have been providing the Australian firms with service roles and information and assist in the decision making critical in the global expansion and improvement of their performance. The experience and education of outside directors has been leading these firms to concentrate more with long-term strategies, which includes internationalisation and global expansion therefore, adding to its list if success in performance (Berglof 1997, p. 93-123). The outside directors have also been playing service roles in the process of decision-making, and their international vision and knowledge has been helping the respective firms in dealing with managerial challenges that associate with globalization and internationalisation. However, challenges have been manifest in these manufacturing firms within Australia, and there is no clear-cut information on the relations between corporate governance, internationalization and globalization (Clarke 2004, p.265-301). This paper looks into the corporate governance, and how it affects internationalization, globalization and performance of Australian firms in manufacturing industry. This study has the main aim as contributing to the literature by investigating the relationship between internationalisation, Globalization, firm performance and corporate governance using Australian manufacturing firms as the sample. Rationality for this research Corporate governance as explained is a set of policies, laws, institutions, processes, and customs, which affect the way a corporation or a given company is administered, controlled or directed. Corporate governance in particular also encompasses the relationships among the numerous stakeholder involved and the objectives or goals for which that given corporation is governed. Therefore, it is arguable that corporate governance is the engine to the operations of any given firm. Studies and literature available has generalized that there is a prominent link between corporate governance, internationalisation, Globalization, and firm performance. As with the Australian firms, they are not an exception to the trends in the relations between these concepts. There is however, less literature available regarding many Australian firms and the relationship among these concepts. Most of the information available includes global trends in firms worldwide but the inadequacy of information on manufacturing firms in Australia is evident. With the modern trends and changes in the operations of firms globally, understanding how Corporate Governance affects internationalization, globalization and performance of Australian firms in manufacturing industry is critical and of value in making decisions on their progress and strategies required to keep them on track within the global operations internationally and dealing with the global changes as well as improving their performances. Purpose of the Study Having acknowledged that there is inadequate information on Corporate Governance and how it affects internationalization, globalization and performance of Australian firms in manufacturing industry, there is thus an evidence of the need for carrying out a study to contribute to the literature on this subject. This study therefore, aims at contributing to the literature by investigating the relationship between internationalisation, Globalization, firm performance and corporate governance using Australian manufacturing firms as the sample. It aims at developing more information and broadens the available knowledge on Australian manufacturing firms with discussions on the corporate governance of the firms and how they affect globalization and internationalization. The study is to assess what information is available through a look into what other scholars have contributed to this field and later gathering information to draw attention to the missing information on the same topic and conducting a study to fill the gaps. Literature Review The recent currency crisis, even in Australia has thrust corporate governance ideally into the limelight on the subject of its adequacy in making sure that the firms function properly (Clarke 2007, p.47-58). The corporate governance issue is further compounded by the pervasive trend in the recent times towards internationalisation of operations of the Australian manufacturing firms. Developments for instance the integration of the global Community, commercial growth and rapid business in the region and divided changes in the political economies in Australia, have opened up marvelous business opportunities for manufacturing firms world-wide (Clarke & Rama 2008, p.12-36). This is an era in which ownership of commercial assets by the foreigners is ubiquitous. Given this kind of global phenomenon, it is predictable that the way of the manufacturing firms in Australia conduct business would develop to be unequivocally complex. Internationalisation imposes greater information considerably processing demands on these firms. Moreover, the impact of internationalisation is intense in the upper echelons of firms (Berglof 1997, p. 93-123). This is expected to increase the agency problem, as the management team at the top would have better specialised knowledge concerning foreign operations and higher discretion levels (Clarke & Rama 2008, p.12-36). Because of this, arrangements in corporate governance of these manufacturing firms in Australia are necessitated in a way that they ensure alignment with the degree of information processing requirements as well as the expected augmentation in monitoring difficulty (Clarke 2007, p.47-58). Considering the Australia’s small domestic market, it would be many peoples’ expectation that the manufacturing firms in the country have a higher degree of internationalisation compared to their US counterparts (Shleifer and Vishny 1997, p. 737-783). However, without a closer look, this argument would not have a greater base. Internationalisation and globalization poses risky and complex managerial issues, which companies have to confront especially with whatever experience and knowledge they have. Therefore, it is outright that the globalization or internationalisation has a part to play in the restructuring of the corporate governance of the respective firms. Crawford (2007, p.59-84) agree that internationalisation and globalization comprises of: (a) the enlargement of the trading countries, (b) the enlargement of the traded commodities, and (c) the sharing of technology internationally. Therefore, it is through corporate governance that organizations can make better decisions to deal with issues of expansion and globalization of the manufacturing firms. Berglof (1997, p. 93-123) defines the internationalisation and globalization degree of a firm as the level to which the company depends on foreign markets for factors of production and customers, and the dispersion of this dependence within its geographic. In the context of Australian manufacturing firms, corporate governance affects globalization and internationalization process in that there is the lack of and difficulty in acquiring the fundamental knowledge for the operations to propel and apply with ease (Denis and McConnell 2003, p. 1-36). This is seen within the Australian firms as hindering the progress of firms to higher degrees of globalization and internationalisation. Clarke (2007, p.47-58) argues in his discussion that commitments to foreign markets in any given firm only strengthen well after firms accumulate enough knowledge regarding those markets. The Australian manufacturing firms have had the corporate governance holding rigid systems that have failed the expansion of the firms internationally. This assertion rhymes with the report from a study by Berglof (1997, p. 93-123) where Australian firms often commence international operations using small steps instead of large foreign investments all being the decisions made by the governance of these firms. In the Australian firms, exporting appears to be the highly utilized form of primary globalization and internationalisation process, unswerving with the risk reduction behaviour of the manufacturing firms in the internationalisation and globalization pattern (Denis and McConnell 2003, p. 1-36). The export strategy simply encompasses firms to send manufactured goods to their counterparts in trade in the foreign country, in which resource commitment and exposure to risk are relatively lower (Clarke 2007, p.47-58). As these manufacturing firms gain more confidence in their operations internationally through the foreign exposure or learning curve, there is a greater proclivity to extend their resources and commitment by means of instituting production subsidiaries and facilities in the foreign countries (Gugler 1999, p.76-93). It is critical noting that Australian manufacturing firms have a sound corporate governance structure organized and well in place to help coping with the ever-increasing complexity levels in going international (Shleifer and Vishny 1997, p. 737-783). Corporate governance covers the mechanism through which stakeholder of a given corporation put into effect control over corporate insiders as well as management such that the have their interests protected (Belkaoui, A 1992, p. 343-35). The most significant catalyst for the mechanisms is the separation of control and ownership, and the precipitation of the main agency problem. Gugler (1999, p.76-93) considered the complexities which arise from a firm when it plans to go international or global highlighting that the plans are accommodated by its corporate governance structure. This is what the manufacturing firm in Australia has been facing as a challenge in the adopting of global changes. Adopting Sullivan’s internationalisation definition, they reflect that the linkage between a firm’s corporate governance structure and the level of internationalisation is critical for two reasons (Stomper 1999, p.6-24). For one, internationalisation places higher information-processing demands considerably on the top management team because of the globally competitive environment where the firm operates. Berglof (1997, p. 93-123) argued that Australian manufacturing firms has been structuring their governance to suit their demands from the global market. As such, arrangements in the corporate governance of these firms come into play in ensuring alignment with the requirements level of information-processing (Stomper 1999, p.6-24). On the same note, internationalisation within these firms increases the specialised knowledge on demand and of requirement by the top management team with relations to the foreign market operations. The level of discretion in the managerial level is also higher, with the fact that the strategic and environmental complexities associated with these manufacturing firms operating internationally (Gugler 1999, p.76-93). The Australian firms have been incorporating the corporate governance arrangements regarding compensation design in prescribing the same to resolve the developed agency problem from issues relating to globalization. Belkaoui (1992, p. 343-35) in the same study on Australian firms noted that, as expected, level of internationalisation and global expansions in these firms does impact on the corporate structure adopted. Their results from the study reveal that longer-term and higher CEO pay, separation of CEO positions and chairperson and larger top management teams’ adoption within the manufacturing firms, aid firms essentially in coping with the developing the degree of complexities (Butler 1985, p.101-124). In the application of Sanders and Carpenter’s approach to the context of Australian firms, it is essential to consider the theoretical probability that having the appropriate structure of corporate governance in place has been the solution to the development of the internationalisation process (Clarke 2007, p.47-58). It is conceivable that Australian firms make decisions on the level of internationalisation or global expansion and their structures of corporate governance contemporaneously, considering the interactive effects the two concepts have on each other (Ismail and Williams 2004, p. 677-713). Exporting in the manufacturing firms within Australia is often the preliminary stage of internationalisation and global expansion. This is the same case as experienced in numerous other emerging economies (Butler 1985, p.101-124). In countries for instance Australia, which were planned economies, manufacturing firms did not have the right of engaging in exporting some time before the economic reforms. In the transition process, exporting constraints and other forms of internationalisation and global expansion have been relaxed gradually in the modern era. For Australian manufacturing firms, exporting has been the critical internationalisation decision with administrative controls on direct investment overseas by the Australian firms, only recently relaxed (Ismail and Williams 2004, p. 677-713). Jarrell and Netter (1998, p.49-68) argue that the corporate governance is critical in Australian firms bearing in mind that the global expansion in such exporting businesses is more risky compared to domestic business because it is subject to shipping risks, international political risks, and foreign exchange risks, among others. When a manufacturing firm expands its business globally beyond the domestic market, it faces other numerous challenges in terms of the diversity of customers, competitors, regulations and cultures, in foreign markets, which the corporate governance has to handle and take care of in the entire process (Butler 1985, p.101-124). In theory, globalization and internationalisation in the Australian firms is not a guarantee to high performance. According to the 3-stage general theory recently proposed and relating to the performance/Multi-nationality (M/P) link, the M/P affiliation is negative at the preliminary stage, positive close to the mid-stage, and holds as negative at the late over-expanded stage of globalization and internationalisation (Belkaoui 1992, p. 343-35). Although manufacturing firms in emerging economies such as Australia may not benefit first from globalization and internationalisation, given that they still play at the early stages, there should ideally be significant, positive benefits, which accrue from the middle stage of globalization and internationalisation (Blair 1995, p.92-103). Therefore, internationalisation and globalization should be beneficial for the longer-term growth and development of the manufacturing firms in such economies. Since internationalisation and globalization may be considered to be a critical channel for making the most of firm value and improving firm performance, improved corporate governance that alleviates principal-agent conflicts has been facilitating exporting decisions and raising export sales for the Australian manufacturing firms (Clarke 2007, p.47-58). Therefore, improved corporate governance in these firms has had a positive effect on the strategies of exporting firms in the Australian economy. Clarke and Jean (2009, p.78-96) handled the issue of corporate governance and its effect on internationalization as well as performance using a different kind of approach. They developed a broad corporate governance measure; Gov-score with 51 factors in eight categories of corporate governance based on a data set from Institutional Shareholder Services. They then made a correlation on Gov-score to the ideal operating performance (ROE, sales growth and profit margin), shareholder payout and valuation (Tobin Q) for 2,327 US firms finding that better-governed firms in the country are relatively more valuable, more profitable, and pay out more cash to shareholders (Belkaoui 1992, p. 343-35). They also revealed that significant governance as measured using director and executive compensation is associated with appropriate operating performance (Blair 1995, p.92-103). Conversely, they reveal that significant governance as measured by bylaws and charter is most exceedingly associated with shoddy performance (Clarke and Rama, p.23-87). They nonetheless put a caveat in their conclusion revealing that although the results signify association between performance and exemplary corporate governance, it does not essentially imply causality. Berglof (1997, p. 93-123) conversely utilized a governance ranking made available by Credit Lyonnais Securities Asia (CLSA) to evaluate the performance of 374 firms in at least 14 emerging markets. Their results reveal that better corporate governance within a given firm is correlated highly with better performance and the ideal market valuation. Gap in knowledge & research questions It is evident from the literature available that Australian firms in the manufacturing industry are subject to corporate governance and it developments over years. On the same note, the firms experience issues to do with globalization and internationalization in their operations especially in such situations where the world is becoming global (Clarke and Rama, p.23-87). These aspects affect the organizations’ operations therefore; have an impact on corporate governance of the organizations stretching to the performance of the overall organization including its achievement of objectives and goals as structured. However, it is clear that there is a gap in knowledge and research questions on matters relating to the changing trends of corporate governance (Blair 1995, p.92-103). The knowledge gap exists in the case that the literature available does not handle the global changes. More on the extensive gap existing is the information specializing on manufacturing firms. Most scholars have dealt with international business in general and in the same case generalizing firms including manufacturing, processing and service firms together (Clarke & Rama 2008, p.12-36). There is no clear cut into how corporate governance affects performance specifically for manufacturing firms. On the same note, most of the data retrieved on manufacturing firms has concentrated on developed countries for instance US leaving out the developing economies such as Australia’s case. Another evident gap in knowledge available on the topic is the comparison between foreign and domestic firms in terms of corporate governance affecting performance of the given firms. Most of the literature assumes international operations for all firms and concentrates on how the elements of globalization and internationalization affect these organizations with a blind eye to domestic firms (Blair 1995, p.92-103). An extraordinary assumption also hails in the operations of manufacturing firms as product based. A gap exists in the service firms with extensive literature looking to product-based firms and concentrating on the corporate governance and its influence on performance from this angle (Clarke and Rama, p.23-87). The assumption creates a gap because the service industries are also part of the firms holding corporate governance and subject to issues of globalization and internationalization. Conclusion Corporate governance is generally a set of policies, laws, institutions, processes, and customs, which affect the way a corporation or a given company is administered, controlled or directed. Corporate governance in particular also encompasses the relationships among the numerous stakeholder involved and the objectives or goals for which that given corporation is governed. A critical theme of corporate governance is ensuring the accountability of particular individuals within a given organization using mechanisms, which try to eliminate or reduce the principal-agent problem. There is one thing clear that Australian firms in manufacturing industry are subject to corporate governance and it developments over years. On the same note, the firms experience issues to do with globalization and internationalization in their operations especially in such situations where the world is becoming global. These aspects affect the organizations’ operations therefore; have an impact on corporate governance of the organizations stretching to the performance of the overall organization including its achievement of objectives and goals as structured. Corporate governance therefore, has significant effects on internationalization, globalization and performance of Australian firms in manufacturing industry. References Berglof, E 1997, Reforming corporate governance: redirecting the European agenda, Economic Policy, pp. 93-123 Belkaoui, A 1992, the effects of ownership and diversification strategy on performance, Managerial and Decision Economics, 13(4), pp. 343-35 Blair, M 1995, Ownership and control: rethinking corporate governance for the twenty-first century, Brookings Institution, Washington DC, p.92-103 Butler, H 1985, corporate governance and board of directors: Performance effects of changes in board composition, Journal of Law, Economics and Organization, 1, p.101-124 Clarke, T 2004, Theories of Corporate Governance: the Philosophical Foundations of Corporate Governance, London and New York: Routledge, p.265-301 Clarke, T 2007, International Corporate Governance, London and New York: Routledge, p.47-58 Clarke, T and Jean, F 2009, European Corporate Governance, London and New York: Routledge, p.78-96 Clarke, T and Rama, M 2006, Corporate Governance and Globalization, London and Thousand Oaks, CA: SAGE, p.23-87 Clarke, T & Rama, M 2008, Fundamentals of Corporate Governance, London and Thousand Oaks, CA: SAGE, p.12-36 Crawford, C 2007, Compliance & conviction: the evolution of enlightened corporate governance, Santa Clara, Calif: XCEO, p.59-84 Denis, D and McConnell, J 2003, International Corporate Governance, Journal of Financial and Quantitative Analysis, 38 (1): 1-36 Gugler, K 1999, Corporate Governance and Economic Performance: A Survey, mimeo, University of Vienna, Austria, p.76-93 Ismail, E. and Williams, K 2004, Corporate Governance and Disappointment, Review of International Political Economy, 11 (4): 677-713 Jarrell, G and Netter, J 1998, the Market for Corporate Control: The Empirical Evidence since 1980, Journal of Economic Perspectives, 2, pp.49-68 Shleifer, A. and Vishny, R 1997, a Survey of Corporate Governance, Journal of Finance, 52 (2): 737-783 Stomper, A 1999, The separation of ownership and control: An Austrian perspective”, in Barca, F. and M. Becht (eds.), Ownership and Control: A European Perspective, forthcoming, p.6-24 Read More