The Role of Parent Country Directors in Business Groups’ Foreign Affiliates

Despite the increasing interest in business groups among scholars, their corporate governance is still underexplored compared to other forms of multinational corporations. In business groups, a variety of governance mechanisms may be at play simultaneously, including the affiliated firms’ own boards of directors. This complexity of business groups’ organizational models complicates the design of an optimal mix of mechanisms for governing the multiplicity of principal-agent relations that may exist. In this paper, we focus on global staffing decisions on business group affiliated firms located abroad. Particularly, we examine the role of parent country directors (PCD) - those whose nationality coincides with tat of the parent company - on the board of foreign affiliates. We frame the parent company’s decision to appoint such directors as a utility maximizing one in which there exists a trade-off between the value added of PCD and their (direct and indirect) costs, relative to other types of directors. Based on agency and transaction costs theories, we theorize that PCD’s main duty is related to the monitoring function, thereby being more represented on the boards of more relevant affiliates. We further hypothesize about the roles of barriers to monitoring and alternative governance mechanisms. Using a large sample of foreign affiliates belonging to over 8,000 international business groups, we find support for the role of PCD as an additional monitoring device. Albeit of less perceived power than interlocking directors, PCD represent a valuable asset in the monitoring of geographically distant affiliates, where the implementation of other mechanisms becomes less feasible.