International Business In Asia Pacific: Application Of Corporate Governance, A Case Of UGL & DTZ

In Brief

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The aim of this report is to critically analyse the role of institutional environment, which was considered as the major contributor to the behavior of UGL and DTZ case using the relevant theories.
This payment deal was related to support acquisition of the DTZ group by UGL and provide consultancy services for a period of 2 years.

Introduction

Modern business environment is changing rapidly thereby forces the organization to develop ethical responsibility. Due to the emergence of technology and acceleration of globalization, corporations today did not limit their presence within the developed nations, rather they have extended their network to other countries depending on their size and capabilities. This advent of globalization, there is a less of government control but greater deterritorialization (Abdullah and Valentine, 2009). Given these changes in the International business, in the last decade, the social role of the firm has come under increased scrutiny (Allouche, 2006) and organization has experienced serious consequences because of moral hazard on the part of companies. Several examples can be quoted to highlight the various corporate scandals such as Marconi and Royal Ahold, WorldCom (Mir & Seboui, 2008), and Enron which all have shaken the value and trust of shareholders. All these situations gave a wakeup call for governance mechanism that ensures greater accountability, rights and responsibility, and transparency among the different participants involved within the organization. (Abdullah and B. Valentine, 2009). Effective corporate governance implies the mechanism to ensure executives to respect their interest and rights of company’s shareholders, as well as making those shareholders accountable for acting responsibly with regards to the distribution, generation and protection of wealth invested in the organization (Aguilera, 2007).

Given that corporate has become a powerful and dominant institutions which has extended to every corners of the globe and their governance has tremendously influenced on the economies as well social landscape, there is an imperative to understand its importance through the case of UGL (2014) and DTZ (2014). Thus, the aim of this report is to critically analyse the role of institutional environment, which was considered as the major contributor to the behavior of UGL and DTZ case using the relevant theories. The case will be analysed in the light of various theories such as agency, stakeholder, stewardship and institutional theory, in order to present an overview of good corporate governance.

Case Study: UGL and DTZ

Sydney-based UGL is a leading provider of end-to-end outsourced engineering, asset management and maintenance services with a diversified end-market exposure across core sectors of rail, transport and technology systems, power, resources, water and defence. Their vision is to partner with corporation and governments worldwide in order to deliver services in a sustainable manner which benefits the people and their shareholders. UGL acquired DTZ (a leading global integrated property service company based in Hong Kong and China) for £ 77.5 million with support of Mr. C. Y. Leung, a director of DTZ (McKenzie et al., 2014). However, before UGL, Tianjin, China’s state-owned enterprise was the other bidder who was rejected by the DTZ board, which included Mr Leung.

The whole case story was how the higher bid was rejected and Sydney based UGL acquired DTZ, which is now selling for about 1US$. Mr. C. Y. Leung is the third and incumbent Chief executive of the Hong Kong Special Administrative region. On November 24, 2011 Leung resigned as director from the board of DTZ and on November 28, 2011 announced his candidacy for the Hong Kong Chief Executive election. Later on 2nd December 2011, it was revealed that Mr. Leung signed a secret agreement to receive payment of $7 million from UGL leaving the other shareholders empty handed and agreement outlined that “support the acquisition of the DTZ group by UGL”. Mr. Leung resignation from DTZ and the agreement with UGL took place before Mr Leung was elected as the chief executive. This payment deal was related to support acquisition of the DTZ group by UGL and provide consultancy services for a period of 2 years

Role of institutional environment

The corporate governance (CG) is defined as “the system by which business corporations are directed and controlled” (Organization for Economic Cooperation and Development, OECD, 2005). This definition clearly emphasizes the relationship between CG with its stakeholders and the society in order to promote accountability, transparency and fairness to manage and to ensure that actions are taken in the key interest of stakeholders.

Since the focus is to analyse the governance transparency of the board members, the report would adopt three theories that would best suit to analyse the environment of Mr. Leung case, which includes the stakeholder, steward and institution theory.. In the case of stakeholder theory, they are any group of individuals who is affected by the achievement of the organization’s objective. The theory suggests that managers of the firm have a network of relationship with suppliers, industry bodies, consumers, government, media, investors, interest groups, employees and business partners to serve the key elements of the business survival (Freeman, 1999). The interrelationship between the networks would enhance the transparency and help firm to achieve the goal, thereby profitability (Gray, Owen and Adams, 1996).

In this case, Mr. Leung tend to hide information about the deal and agreement he made with UGL (Australian firm) to achieve his own interest. A secret agreement dated on Dec. 2, 2011 to pay 4 million pounds (US$6.5 million) in two instalments. This goal of interest contradicts of those shareholders. As emphasized by the theories (e.g., Fama and Jensen, 1983) and others Boyd, 1995) that such an activity implemented by Mr. Leung (in this case) will tend to maximize his interest at the expenses of shareholders and would create inevitable loss of firm value. Moreover, their activity of transparency through this stakeholder theory is to disclose necessary reports to shareholders (Craig, 2010). However, in this case Mr. Leung did fail to disclose and discuss his transactions with their shareholders. In fact, he also left employing DTZ staff for two years following UGL’s acquisition of the subsidiaries of DTZ holdings (Grigg & Murray, 2014).

Stewardship theory protects and maximizes shareholder’s wealth through performance of the firm (Davis, Schoorman & Donaldson, 1997). In this case, stewards are company executives and managers working for the shareholders where this theory stresses on the role of top management; thereby strengthen the upside of the relationship (Donaldson & Davis, 1989). In this case Mr. Leung, a steward of the firm (DTZ) hided the transactions from the stakeholders that he had received from the Australian firm. . Further, being a director of DTZ Mr. Leung had the fiduciary obligations to safeguard the company’s interest and duty to act in good faith in the best interest of the company. However, he failed to inform the transactions that would affect the sales of DTZ. However, any control and monitoring mechanism on Mr.Leung (steward) would negatively impact on DTZ (firm) performance as it focuses on individual performance. Therefore, trust dimension is a significant factor that builds the relationship between stewards and principals. Institutional theory argues that firms are not just a place where goods and services are produced rather they are also cultural and social systems (DiMagggio & Powell, 1983). This theory pressurized to meet certain CG, which is linked to the performance of organization where several researchers asserted that it’s the openness about human behaviour (Seal). All the four theories provide different views of CG where agency theory emphasized on separation of ownership and controllability where owners take actions in order to achieve their own interest (in this case where Mr.Leung served as director and Chairman of its Asia Pacific Operations) while stakeholder theory proved agency by focusing on all stakeholders. Stakeholder and institutional theory deduced CG towards social relationship rather than structure.

All the theories emphasized its importance on how good CG should be as emphasized earlier in this report. From the report, it is concluded that there is no single theory that could provide a good CG. However, keeping the Mr.Leung’s case (DTZ and UGL), effective CG should ensure compliance with the best practice, enhance democracy of shareholders, better protection of employees, and foster employee’s participation. In any case, the director of the firm must be careful about his duties and obligations, and should not involve unethical transactions with the purpose of gaining personal benefits.

Role of the nation state and Multinational Corporation in this case

In the globalized world, the growth and proliferation in Multinational Companies (MNC) have positive effect over the global economy by increasing the employment and growth in the host company. Hence they are also called as ‘big businesses’ as these are the most profitable sectors in the world (Chandler and Mazlish 2005, Penrose 1995). At the same time, there are also the other claims that multinationals look for best opportunities for investment, playing against local or national government and enter into domestic market in an attempt to obtain higher returns (Jensen, 2006) . Yet, such approaches have created imperfect market approaches as indicated in the previous literature. Although the MNCs may enjoy a considerable power of bargaining prior to investment, there would be a large degree of shifts to the national government once it secures the deal (Bauchet, 2003). Meier and Schier (2001) stated that “MNC is an organization owing or controlling enterprises or physical and financial assets in at least two countries of global economy and opting for a multi-domestic strategy founded on social-economic differences among these countries (as a reply to specific local demand)” (p.8).

The term Nation-state can be termed as the political unit which is developed based on the contiguous territory, in generally, which is not dependent over the external force and has a dominant language and shared traditions. However, in accordance to the theoretical argument, Nation-state is known as “long-standing linguistic trick” that combines the nation and the state in a single group. Even though MNC and nation-state operate under single global economy, they are two distinct regimes but such relationships are often acrimonious. The operations of nation-state are formulated based on the principle national jurisdiction which enhances the well-being people within that jurisdiction. However, it has been reported that, on the contrary, the MNC enhances the stakeholder’s well being without considering the national jurisdiction’s consequences (Vernon, 1999).

The effect of globalization has raised various concerns over the theories of Corporate Social Responsibility (CSR) literature. As any firm’s primary goal is to oblige and operate in a socially responsible manner (Carroll, 1979) while MNC with the vast power carries equal responsibility to be ethical, moral and (Carroll, 2000; Minzberg, 1983) earn a fair return for investors and comply with the law. In addition, they are primary responsible for the employees, customers, environment, state and local government and the local community (Velentzas & Broni, 2010). CSR also attempts to curb misbehaviour of corporate both internally and externally such as environmental abuses, human rights and corruption. For instance, any activity that would cause the firm’s downfall, CSR attempts to prevent such corporate frauds and corruptions (Dine, 2004). This particular question on the role of national and multinational state in addressing the issue of CG, the report would apply CSR theory. The MNC’s authority and control over the host country have made the nation-state powerless, and these MNCs have no concern about the host country’s economic, social and environmental surroundings (Crowther & Rayman-Bacchus, 2004). This can be observed from the way they had entered Hong Kong to acquire the deal of DTZ. Australian firm identified Mr. Leung as a channel partner to best communicate their interest over decision makers and corresponding authorities. Secondly, both MNC and national state have failed to address the loss incurred to the overall economy. For instance, for nation state the deal of Tianjin, China’s state-owned enterprise was the other bidder who was rejected by the DTZ board, which included Mr Leung, which incurred lost to the economy of the country. Thirdly, after acquisition employees were allowed for a two years contract period, which is against the CSR theory. Fourthly, the sale deal also left shareholder and unsecured creditors nothing but with debts worth tens of million dollars. However, the most unimpressed situation is where the responsibility of the local government. When Mr. Leung was interviewed about the deal, he responded by saying he had done anything legally wrong (Xueying, 2014) and failed from his moral authority to govern.

In the corporate world, the scandals like bribery and other forms of corruption have been increased in which it has been highlighted in two distinct circumstances. This includes the impact between white collar offending and corporate i.e., acting against the firm and other category is between corporate and directorial responsibility, which affects the stakeholders, employees, consumers and others. In the second category, based on the field of corporate crime, there are two separate distinctions, which include the corporate entity’s accountability and the accountability of individual director’s accountability and officers involved in the crime. From the case, it can be observed both national and MNC failed to be socially responsible and violated the international norms in the areas of human rights. Mr.Leung case was a typical example where the majority of the stakeholders interviewed claimed that “It is standard business practice to pay for such [noncompeting and no poaching undertakings, as you are requiring the individual to take on obligations and to forgo future opportunities (Stout, 2014),”. This illustrates that there is no international court to address the issue of corporate responsibility (CR), but rather international law claimed to deal indirectly through the mechanism of state to enforce soft law initiatives.

In an era of corporate power and influence, nation state also lacks a mechanism to regulate corporate behaviour (Addo, 1999) Likewise, the influence of MNCs has made the nation-state the victims of globalization to be the “the national social bargains” (Ruggie, 2002) and instead of promoting the host-country social objects like redoing the poverty, enhancing both the standard of labour and human rights, this has led to “wreaking of rules” (p.30). Hence from this it is clear that the globalization’s negative effects have led to the development of CSR programs, and this development has been underpinned by anti-globalization sentiments (Brejning, 2013). Overall, both MNCs and National state has considered the CSR in the light of profit maximization and failed to recognize that they have an additional responsibility to society. Although the CSR issues, are tightened post Enron era, which affected the shareholder and employees, but still such practices prevailed widely as there are lack of effective governance mechanism and law to protect the stakeholders.