Active boards of directors in foreign subsidiaries

Abstract

Research Question/Issue: This study examines the conditions under which foreign subsidiaries maintain active boards of directors. Active boards are in this study defined as boards which perform tasks beyond fulfilling local legal requirements. We focus on both monitoring and service roles. Research Findings/Insights: Based on a sample of 83 foreign subsidiaries operating in Belgium with headquarters in 14 different countries, we find that a foreign subsidiary is more likely to maintain an active board if it is a world mandate subsidiary, which has worldwide responsibility for a product line and performs a broad scope of value-added activities. Moreover, a foreign subsidiary is more likely to maintain an active board if it is larger relative to the multinational enterprise (MNE), if it has a higher level of local responsiveness, and if its past performance is poorer. Additionally, the presence of an active board in a foreign subsidiary is related to other control mechanisms deployed in the subsidiary. Theoretical/Academic Implications: Our results highlight the conditions under which foreign subsidiaries are likely to maintain active boards. Moreover, we provide empirical evidence that agency theory and resource dependence theory are relevant and complementary in the analysis of active boards in foreign subsidiaries. Practitioner/policy Implications: This study suggests that an active board may be a control mechanism to govern foreign subsidiaries and an instrument to deal with the external environment. Corporate governance regulators may consider developing governance recommendations that emphasize the importance of subsidiary boards in the oversight of foreign subsidiaries.