Team Production and the Multinational Enterprise

• Publication year: 2014
• Citation: Vol. 38 No. 02

SEATTLE UNIVERSITY LAW REVIEW Volume 38, No. 2, WINTER 2015

Team Production and the Multinational Enterprise

Virginia Harper Ho(fn*)

I. INTRODUCTION

Margaret Blair and Lynn Stout's path-breaking article, A Team Production Theory of Corporate Law, advances a dual thesis: first, that team production theory does a better job than its competitors (in particular, principal-agent theory) of explaining the advantages of the public corporation and key features of corporate law; and second, that, as a matter of corporate law, corporate boards are charged with advancing the collective interest of all the contributors to the corporate enterprise rather than the shareholders' interests alone.(fn1) Its central insight is that the role of the independent, or insulated, corporate board is to serve as a "mediating hierarch" among the contributors to firm value.(fn2) As new crises of corporate accountability over the past decade have been met with policies centered on corporate boards and shifts in the balance of power within the corporation, these propositions have moved beyond the academy and into the center of policy debates on the nature and purpose of corporate law.(fn3)

This Article looks back at Team Production Theory and considers its implications for the governance of global multinational enterprises (MNEs). It argues that team production problems in fact arise at multiple levels within global firms and that, therefore, team production theory, as well as principal-agent theory, is necessary to explain MNE governance. Admittedly, Blair and Stout's work focuses on public corporations, most of which are global firms, and their work also assumes that shareholders and other contributors to the corporate enterprise are both individuals and legal entities. However, in order to more simply articulate how corporate governance rules reflect a team production approach, their account depicts the corporation as a freestanding legal entity formed by a team of (real) people and governed by a single board as the intermediary between the shareholders, managers, and other constituencies.(fn4)

In actuality, as they acknowledge,(fn5) the firm is not a single legal entity, but is instead a complex economic organization, or corporate group, composed in some cases of hundreds or thousands of legal entities, not all of which adopt the corporate form. The corporate group is typically defined by a parent corporation's ownership or control of the equity of direct and indirect subsidiaries, each with a separate legal identity.(fn6) For corporate groups that operate globally, the distinct legal entities that comprise the MNE have characteristics defined by their jurisdiction of incorporation, which may differ from the jurisdiction of the corporate parent.

Given these realities, Blair and Stout's conclusions raise several interesting questions when applied to the MNE and other complex corporate groups. First, where do team production problems arise within the MNE? Even limiting the scope of the inquiry to corporate entities, does team production theory account for governance rules only of parent corporations, or of subsidiaries as well? Does the answer depend on the functional role of the entity? How does team production theory inform firm governance if there are multiple "mediating hierarchs" within a corporation? Which board(s) within the MNE are "mediating hierarchs"? Although Blair and Stout advanced team production theory as the best explanation of the governance of the publicly held Berle-Means firm, might team production dynamics also dominate in non-Berle-Means firms, such as controlled entities within the MNE, where principal-agent theory might be expected to apply most directly? If the public corporation should instead be viewed as a unitary enterprise, which stakeholders should be viewed as the contributors to the corporate enterprise? The ultimate, local stakeholders of the firm's affiliates, dispersed around the globe, the affiliate entities themselves, or perhaps only the immediate constituencies of the ultimate corporate parent within its jurisdiction?

The answers to these questions have important theoretical and practical implications. First, at the level of theory, the strand of corporate governance scholarship dealing with the relationship between shareholders and management typically focuses on the rights of dispersed shareholders in the public corporation, and so does not consider the role of directors and officers of the firm's subsidiaries and other affiliates.(fn7) Similarly, corporate governance rules protecting minority shareholders assume that controlled subsidiaries will generally behave as mere agents following the dictates from the peak of the corporate pyramid.(fn8) In either case, agency relationships, rather than the contracting problems associated with team production, necessarily dominate. However, if team production theory is limited to the boards of publicly traded corporations at the helm of the corporate group, then corporate law is of less relevance within the MNE, and it is less clear that team production theory outpaces principal-agent theory at either a descriptive or predictive level. We might expect, though, that if team production theory best explains corporate law, its basic rationales should hold regardless of whether the corporation is a free-standing entity, incorporated within a given state, or is affiliated with other entities as part of a larger firm. Second, as discussed below,(fn9) corporate law is more ambiguous with regard to the corporate objective function of subsidiaries than of parent entities, so the evidence presented here that subsidiary boards also serve as mediating hierarchs lends support for Blair and Stout's more general claim about the fundamental stakeholder-oriented nature of corporate law.(fn10)

Finally, if corporate boards at different levels within the MNE serve as mediating hierarchs, then subsidiary boards and their relationships with one another and with their parent(s) take on greater importance within corporate law. Of course, many subsidiaries are formed in order to achieve a certain tax status, facilitate a specific transaction, or play an otherwise passive role in the MNE; in these cases, the subsidiary board, if it exists at all, forms a largely place-holding function. However, recent work by management and strategy scholars has identified a range of subsidiary roles with varying degrees of autonomy and authority within the MNE. These studies find that the horizontal relationships and roles of affiliates may in fact be more important to firm value than vertical parent-subsidiary relationships.(fn11) Traditional understandings of global firms as simple hierarchies, characterized by unidirectional, top-down governance and control, have given way to organizational structures that shift flexibly between hierarchy and "heterarchy."(fn12) This complexity and its implications for firm governance and regulation have not been well examined in the legal literature.

This Article responds by extending Blair and Stout's work explicitly to the MNE-a project that necessarily involves multiple dimensions. The first, taken up in Part II below, is to unpack findings from strategic management and organizational theory to better understand the organizational structure of these complex global firms. The second, which is the focus of Part III, is to consider how team production theory applies to organizations that exhibit "multiplex" governance, that is, firms with multidimensional, multijurisdictional, and intersecting governance structures. In these firms, there are multiple, overlapping principal-agent relationships and coordination among them may require the cooperation of multiple mediating hierarchs. This complexity suggests that greater attention should be directed toward the role of subsidiary boards and management.

A full treatment of the implications of these findings for corporate law, or for the broader regulation of global firms, is beyond the scope of this paper. However, this Article contributes to that effort by laying a foundation for further research. It concludes by suggesting areas in which legal rules might better reflect these organizational changes in global firms and identifying remaining questions regarding MNE structure. The role of active subsidiary boards within the MNE deserves greater attention from scholars of U.S. corporate law, given the number of U.S. firms that are targeted by foreign acquirers or that are undertaking inversion transactions that introduce a foreign parent corporation but retain operational control in a U.S. subsidiary, not to mention the dominant role that many U.S. subsidiaries play within global MNEs.

Like Blair and Stout's work, this Article limits its focus to the role and function of corporate entities and their boards, even though corporate groups also include noncorporate business entities. However, this inquiry differs from Blair and Stout's work in two important ways: by examining the internal governance of the MNE, it considers the extent to which team production theory applies to nonpublic corporations and to wholly or partially controlled corporations that are part of, but are not themselves, Berle-Means corporations. This effort confirms Blair and Stout's observations that team production problems are ubiquitous and that they arise within firms with different, and perhaps more concentrated, ownership...