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AGENCY PROBLEMS IN MULTINATIONAL CORPORATIONS (MNCS)
1.0 Agency Problems in Multinational Corporations (MNCs)
1.1 Principal-agent conflicts between shareholders and managers
The principal- agent conflict originates when the interests of the company management (agents) differ from
the shareholders interest (principals). In these circumstances, leaders can serve themselves, therefore,
their personal objectives like job safety and personal wealth may become more focal points than
shareholders' objectives, which are firm value maximization. Consequently, an imbalance in expectations
often arises that results in dysfunctional decision-making or resource allocation. Managers instead could
engage in activities that preserve the power and owning interests of the most senior but, simultaneously,
listeners’ returns would be consequently reduced (Bebchuk & Weisbach, 2010). Such a tactic could cover
up the actual shortcomings of the managers who might excessively emphasize on the quarterly projects
that pull the immediate earnings but not the sustainable growth. The complexities of conflict management in
these situations are demonstrated mainly in the corporations of multinational scope because of the nature
of their operations and the complexity of control and oversight due to these corporations operating in
various jurisdictions and geographical areas. Shareholding labor market can lead to managers taking
decisions which are not in line with shareholder's interests as they can do things like risk taking at high
levels and under investment in profitable projects. Corporate governance mechanisms that are effective,
such as creating and using performance-based incentives, as well as having board oversight that is
rigorous, are crucial for realignment of managerial behavior and investor interests (Adegbite, 2015).
Performance based salary structures, like Stock options and bonus plans that allow managers to share in
the success of their firm performance, can encourage them to work for long-term value growth. Strict
boards’ supervision guarantees that those people at managerial level being watched over and
shareholder’s interests getting well-kept. Besides that, the role of external governance (including market
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competition and regulatory scrutiny) in preventing principal-agency relationships problems is significant
enough, as it enhances the price that the managers will pay for the wrongdoings and maximizes
transparency (Abyad, 2018). Managers have to make competition organizations to perform efficiently, as
business cannot do without shareholders’ curiosity and financial consequences because of inefficient CEOs
and executives. On the one hand, there is regulatory supervision, parliamentary reports, and disclosure
requirements. On the other hand, legal accountability exists which will help to be sure that Managers are
serving as agents of the shareholders. In this cohesive internal and external governance framework, the
principal-agent problems are addressed with a view to enhancing overall corporate efficiency as well as its
focus on investors in the financial industry.
1.2 Information asymmetries and monitoring challenges
The asymmetric information exists between shareholders and managers that is the real issue for the board
of directors to monitor them and defused principal agent conflicts. Information asymmetry is common
phenomenon in companies which managers hold more information about the inner working of a firm than
shareholders, which could create power relations between management and shareholders who may use
this information to act in their own best interest (Balakrishnan et al. , 2019). This information deficit creates
deficiencies in monitoring and ensuring overall management by the board of directors and shareholders
since managers cannot be made accountable for their actions. The manager can withhold or reshape the
information which leads to the strong representation of an organization's performance simply to secure their
greater compensation or to avoid some harsh questions date from the decisions made being poor.
Exposition of information and transparency in disclosure is needed to restore the trust more. Through a
comprehensive financial reporting, which includes detailed earnings reports as well as forward-looking
statements, the shareholders are now able to judge more accurately the characteristics of the firm and its
behaviour in the industry. The frequent communication, like four-time earnings calls and shareholder
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gatherings, also really make a substantial difference in acquiring the shareholders'- attention and letting
them know what's going on (Abyad, 2018). The role of external audits and independent board members at
offering unbiased information that the performances of senior executives and as those as it is protecting the
preferences of shareholders cannot be underestimated. Independent audits conducted to unpaid
accounting firms reputancy can verify the financial statements reliability and find any disturbing issues. The
independent members of the board, separate from the management influence, are able act in an impartial
manner, and they can challenge those who may not follow the shareholder's interests. On one hand,
credible corporate governance mechanisms, such as those that enforce strict standards of transparency
and accountability, should be advanced to prevent te worst occurrences of information asymmetry. These
rules might be built around the policies that require disclosure of CEO compensation, linked party
transactions and risk processes the organization implements. The implementation of the forecast standards
allows the managerial actions to be under control of surveillance and appointed with a major targetor of
shareholder objectives, therefore, the trust and the niche of the opportunistic behavior are decreased.
1.3 Diverging interests and goal incongruence
A misalignment of the winning goalities between shareholders and managers occurs quite frequently; the
strategic objectives that managers may pursue are sometimes opposed to those of shareholders.
Shareholders naturally look for long-term value creation, while managers might consider profits in the short-
term, protection of their job, or other less ambitious goals (Adegbite, 2015). This imbalance, for its part, can
be seen in poor decision-making, including mergers and acquisitions that are designed to enhance
managerial prestige, while neglecting the value to the shareholder, and reporting earnings as being higher
than those actually gained, so as to meet short-term targets (Balakrishnan et al. , 2019). Making managers
engage in activities that result in short-term gain might lead to loss of future profits. This is due to the fact
that the profit is the main means for the firm to survive in the future. As another instance, they could cut the
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expenses on the vital research and development to accelerate the quarterly earnings or open themselves
as not involved in the innovation or competitiveness. Firstly, the solution is working out the strategy for
compensations that is compatible with the general objective of increasing the shareholder value. Aligning
executive compensation to a performance measure over the years and shareholder returns can thus
become the link between the achievement of managerial goals and the value of shareholder. Performance-
based stock options or long term incentive plan may vest over several years could guard against the
temporary change of managers commitment trying to improve the company performance for a short time
(Bebchuk & Weisbach, 2010). Increased disclosure necessities and transparency measures are as well
needed in this regard as they provide a structure for shareholders and managers’ co-operation. The
establishment of comprehensive financial reporting and regular communication can perhaps broaden the
information gap and so promote greater monitoring as well (Abyad, 2018). Adopting the governance
principles involving the stakeholder engagement and strict oversight will promote the equity inside the
company and will be no doubt in the interests of the shareholders. Building a company of a high moral
character which highlights ethical behavior and long-term value creation is key to avoiding aim
misalignment. The chief actors in sensible governance systems must have stringent disclosure and
accountability requirements so that the detrimental influence of information disparities is minimized and the
management activities are in synch with the shareholder's targets.
1.4 Cross-border complexities and cultural differences
Inter-national operations of corporations are always filled with layers of complications derived from cultural
gaps arising as a result of organizational structure. Such complexities often exaggerate principal-agent
conflicts in those enterprises. A completely different standard of management, governance, as well as
culture across the globe can, on the other hand, be problems that pose a challenge in the supervision of
managers’ conduct (Abyad, 2018). Say for example, multiple disclosure requirements and enforcement
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mechanisms can create unevenness of the financial statements and corporate transparency which reduces
the effectiveness of shareholders to monitor the management during the annual reporting process.
Managers in various countries may follow the local practices that don't match the overall criteria for
governance, which may lead not only to the splitting up of the governance and decision making process
among the branches of the corporation, but also to the ineffective oversight mechanisms. Culture too
unsoundly exteborates these issue jumper thus make them worst. Cultural norms and a number of
managerial behaviors as well as corporate governance structures can heavily depend on culture, affecting
of the decision-making processes and risk assessment procedure (Aguilera and Cuervo-Cazurra, 2022). In
certain societies with rigid bureaucracy and hierarchy, the supremacy of authority might hinder critical
appraisal and constructive dialogue, hence weakening the watchdogs and probably increasing corrupt
practices of the managers. Alternatively, communities where competitiveness and assertiveness are central
values might influence managers' attitude to take more aggressive risks or favor to actions that do not align
with long-term shareholder interest in wealth creation. Developing global conduct regulations for good
governance, which provide a uniform standards, practices across all jurisdictions may raise this level. It is
likely that such governance codes would be tailor-made in order to factor the local peculiarities
notwithstanding the overall non-negotiable parameters which the corporation must uphold. Intercultural
understanding, one of the essential questions, too needs to be addressed by the organization. Cultural
orientation training like educating managers and employees about the norms that may exist in each other’s
government in terms of governance expectations can help build mutual understanding and cooperation
(Adegbite, 2015). Constructive communication and collaboration among the NHQ and subsidiaries is
crucially important to maintain ‘heads & tails’ coordination and ensure that governing principles are uniform
across different jurisdictions.
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2.0 Corporate Governance and Ownership Structures
2.1 Separation of ownership and control
Distribution of power in an enterprise may be regarded as a governance problem, agreeing to main
economic theorists. Such a division is between the entrepreneurs, who own the business, and the directors,
who manage the company's affairs. A correspond boothlight, Boatright (2017), reveals this structure can
instigate agency problems such that the goals of the managers (agents) do not align with the interest of the
shareholders (principals). The managers for instance might be motivated by their objectives at the expense
of maximizing shareholder returns. Let's say managers consider a task that glorifies their performance or
rigidifies their position in favor of activities that investor expects. On the other side, Bushman and Smith
(2003) note that transparency and meaningful financial statements are the two pillars on which governance
issues should be addressed. They postulate that elevated disclosure levels lessen the information
inequality between shareholders and owner managers, as a result bringing alignments of interest closer.
This is an improvement that could be made transparent through detailed and frequent financial disclosers
that are designed to give investors the necessary information to keep tabs on, and assess, managerial
handiness. Choi and Shepard (23) seem to agree that, in multinational enterprises alike, the complexity of
the operations boosts these agency problems calling for more governance mechanisms to prevent
managers from pursuing personal objectives instead of shareholders. Therefore, in such an environment
that is subject to diverse regulations, different market conditions, and different cultural expectations, this
fogginess in the actual management performance becomes more complex, which can affect the leading
managers. Furthermore, recurrent components which include business performance-based pay,
independent board supervision, and influential shareholder participation are important methods of
addressing corporate governance challenges. Jensen and Meckling (1976) also bring up the fact that equity
ownership by managers ensures that they have the same interests as the shareholders of the company
and consequently they will less likely to be motivated by their own interests rather than those of the
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stakeholders. Fama and Jensen (1983) also have similar ideas of improving the managerial system by
separating management functions from decision-taking authority. Therefore, reducing the public's
accountability and promoting efficiency in control.
2.2 Concentrated versus dispersed ownership models
The ownership structure industry plays a key role in governance and the outcomes. In concentrated
ownership delineation, a few shareholders own a large percentage of the enterprise's shares. Claessens
and Yurtoglu (2013) posit that in the EMs separated ownership is more frequent and can align owners and
administrations, subsidizing agency costs. This is attributed to the fact that major shareholders may have
the motive, as well as the power, to pursue active management oversight and influence decisions, for a
purpose of achieving shareholder interests which should correspond with the management decisions. They
can put strict key performance indicators in place and check if managers take responsibility which later on
is useful in reducing the principal-agent dilemma. On the other hand, the dispersed ownership model along
with fewer shareholders being involved are generally seen in developed markets, where the holders of the
stocks are spread across large groups of investors, often with negligible direct supervision capability toward
their management. In the diversified way of business, these agency misconceptions may take place
because there is no forceful mechanism due to the free-rider issue. Here each shareholder may lack the
platform to cross check the administration (Boatright, 2017). These owners do not feel responsible for their
actions because they believe nobody cares about owners dilution. Attempts to involve in governance
reveals the vulnerability of the management to intervention by their superiors. Bushman and Smith (2003)
state that in this realm, regulations and disclosure requirements are more crucial than ever to ensure the
security of the shares of shareholders (ibid). Strength in transparency and sound reporting rulesaids to
provide clarity, cause the level of information asymmetry to drop, and helps shareholders make informed
investment choices as well as holds the managers accountable. Chung, Jiang, and Sun (2022) note that
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multinational firms can have their ownership structure affecting internal capital markets and tax strategies,
so the influence of such structure is not limited to just one party. Multinational activities do not only
introduce more complication, which include operations under different regulatory regimes and tax laws.
Such complexity needs specially designed mechanisms of supervision to prevent from the misuse by
managers for personal interests.
2.3 Effectiveness of boards and executive compensation
The board of directors is a position very important for supervising management, as well as it is the function
of the board of directors to ensure that the company strategy meets shareholder interests. Boatright (2017)
emphasizes that the features of a successful board namely the independence, diversity, and the necessary
skill set for challenging and guiding management decisions plays a determining role in the ultimate success
of the organization. The independence is vitally important as it helps to avoid conflict of interest, and the
directors are allowed to make independent decisions that only help the shareholders. Diversity brings
different point of view, making the board more capable in the terms of minimizing complex problems and
running new projects. Knowledge makes the possibility that board members will have the wisdom that is
necessary for supervising management effectively which happens when there is expertise. Nevertheless,
independent directors can sometimes have problems regarding independence in emerging markets
because of family ownership or other connections [Culled from Claessens & Yurtoglu, 2013]. Such
relationships of family or closeness may lead to other undesirable actions, including that of directors
making decisions that not in the interests for all shareholders but in those of family ones. Executive
compensation is one other highly effective tool to strike the balance between the interests of managers and
shareholders. Bushman and Smith (2003) emphasize that usual performance based compensation would
not only invite the executives but the top management to strive for strategies that would increase the
shareholder’s value. The incentive based approach links the executives' financial remuneration with the
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performance of the company thereby motivating its managers and supervisors to address the challenges
towards the attainment of success by the company. On the other hand, Choi and Shepardson (2022) allege
that the compensation packages cap size risk, regardless of the structure, while having the risk of
excessive risk-taking or short-termism. .To exemplify, if the will of executives is to be rewarded on daily
stock price growth, they might put wide range of just short-term profits instead of persistent development,
which is a great long-term harm to the company. Henceforth, the appropriate wage remunerations need to
be structured and the Board, well built to avoid corporate ill health. It implies setting up performance metrics
to achieve both some quick wins and meeting the long-term goals of the organization, bringing independent
board members onboard to provide needed knowledge and skills, and encouraging diversity to enrich the
decision-making process.
2.4 Shareholder activism and stakeholder influence
These days companies' shareholder activism and stakeholders' input are becoming principle elements of
corporate governance. Citing Claessens and Yurtoglu's study, those two researchers state that activism
can be used as an effective tool to combat management incompetence and to hold management
responsible. The activist shareholders may use such techniques as proxy battles, public movements on
media, or the other private dialogue with management that helps to gain the desired changes. Boatright
(2017) captures the fact that the activist shareholders typically demand changes in board membership,
executive payments, and the general strategy of the company. Such campaigns may result in major shifts
in a company's management system, and consequently, whatever stakeholders' impartiality may be taken
into account along with the issue of any managerial complacency will be addressed. What is more, we must
all take into account what other stakeholders think, the employees, customers and the local community.
According to Choi and Shepardson, (2022), multinational companies have an obligation to accommodate
the numerous diverging viewpoints of stakeholders, while these stakeholders may affect the company’s
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reputation and efficiencyWorkers are just one of the critical components which help companies to keep
efficient and dynamic. Therefore their productivity and willingness are in the focus as they affect the
performance and future of the organization. Customer is the source and influencer of net revenues and
growth, and therefore the organization will have to try very hard to keep their trust and loyalty in order to
maintain and progress. The community and broader societal interests play an important role in that they
determine the ‘social license to operate’ granted to a company. If the company’s operations are not aligned
with the community and broader societal expectations, its ability to operate will be severely affected.
Bushman and Smith (2003) highlight that just not shareholders, but all other stakeholders for example
employees, customers, suppliers acquire trust and feel more engagement if they have opportunity to
experience transparency in reporting. Report that is precise and truthful will help all parties to be aware of
the company's achievement, its strategy, and its challenges which then cause to chance opinion and
actions suitable to situation. This is how the public and stakeholders get to appreciate honest and
accountability which majorly contributes to maintaining credibility and transparency. Similarly, more than tax
avoidance, social responsibilities are one of the key factors that affect the corporate policies. The
comparative research led by Chung, Jiang and Sun in the current year highlight this complexity of modern
corporate governance.
3.0 Transfer Pricing and Tax Avoidance Strategies
3.1 Shifting profits to low-tax jurisdictions
The most widely used tactile business medical multinational corporations is to minimize the switching to the
low- taxation zones in order to curtail on their overall tax burden. This practice in such cases is intended to
get relative low tax rates by changing the structure of income inside the company and redistributing the
income between the different subsidiaries or affiliates, located in the countries with lower tax rates.
Discovering that tax strategies are mostly an outcome of the different tax rates from country one to the
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other, thus firms decide to utilize profit shifting. They believe that these forms of business with high
power syndrome and CEO compensation based on their performance are more susceptible to search for
the possibilities of an overtaxed system. Under this policy, directors general do tend to associate
executive's motivation with low earnings through adoption of latest strategies to minimize tax hence
increasing, ultimately, the reported earnings and the reward to the director. Dyreng, Hanlon and Maydew
(2010), find that the high level employees are the main cause of tax avoidance as they have the ability to
make future strategic controls. A directorial executive with an expert-hood and threshold of risk relates to
how developed will the company pass on transfer pricing of its products – executives that are experts and
their risk tolerance threshold are high lead to more aggressive transfer pricing. Another instance is when
the sole proprietorship owner likes to be involved in decision-making and having control. This is evidence of
the ‘executive’ view where the entrepreneur him/herself has the knowledge of the international tax laws and
goes for more aggressive strategies. In order to accomplish this, the business owners apply trusts that
foster the discovery of legal backdoors, and the creation of elaborate financial architectures to duck rulings
in multiple jurisdictions and achieve fewer tax burdens. Feld and Heckemeyer (2011) indicate that very
many probably yes and also add to the claim that tax consideration is a big factor that influences the flow of
the foreign direct investment because companies make critical decisions that are meant to fit their
operations locations into a country's favorable tax regime which is then expected to produce the maximum
post-tax yield. The LLC structure is evident by virtue of this strategy as it results in low tax rates, tax favors,
and opportunistic regulations.
3.2 Manipulation of transfer pricing mechanisms
The abuse of transfer pricing mechanisms is another method that transnational companies resort to take
advantage of its international presence to lower its tax liabilities. Transfer pricing constitutes one of the
controversial issues in international taxation. It deals with the sales price of the goods, the services, and the
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intellectual property included in the transfers between the companies' subsidiaries located in different tax
jurisdictions. In the context, Desai & Dharmapala (2009) rightly point out that by determining transfer prices
either higher or lower than the actual market, companies can afford the larger inherent profit to low-tax
jurisdictions and less revenue to high-tax jurisdictions to avoid high overall tax expenses. For example, a
company can heed to its subconsories located in high-tax country and sell their products to a subsidiary in
a low-tax country at artificially low price and then benefiting from the low-tax jurisdiction’s profit. Moreover,
the transfer pricing in service or intellectual property manner could make inflated bills from a subsidiary with
low tax to subsidiary with high tax but ultimately the high-tax region loose the profits. Dyreng et al. (2010)
noted that the efficiency of the price manipulation through transfer pricing is affected by the regulatory
climate and the intensity of the tax authorities scanning. They point out this fact that companies, which have
access to more advanced tax planning systems, successfully use those opportunities in a way that does
not attract a special attention. What these multinationals do very often is to hire for their production or
service the teams of experts in the filing of tax returns. These teams design sophisticated transfer pricing
schemes which comply with the letter of the law yet they always push it to the limit of what is permissible.
The complexity and opacity of these arrangements may, thus, be a major challenge to the tax authorities as
it becomes difficult to uncover and counter the aggressive transfer pricing practices in the jurisdictions with
less experienced enforcement mechanisms. Fama and Jensen (1983) reason that inter-farms disjunction of
ownership and control entails that the shareholders may not have the required information and expertise to
monitor these kinds of transfer pricing antics, much more, to challenge them. A separation is the board
responsibility for the daily running of the company including tax strategies, while shareholders who may
lack visibility or competence may not be able to assess the implications of these Tax strategies accurately.
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3.3 Exploiting legal loopholes and tax havens
Through tax planning, the use of legal loopholes and jurisdictions where there is no tax is most popular in
the realm of corporate tax avoidance. Tax havens are countries or shores where companies get as close as
possible to paying zero taxes and where the laws are in place to encourage such behavior. Desai and
Dharmapala (2006) reported that multinational corporate entities are wont to reap the advantages of
loopholes and exceptions in international tax laws by incorporating their profits through tax heavens in this
manner, allowing them to pay much lower than their actual tax liabilities. This approach though usually legal
can be problematic with regard to the ethics and fairness discussing because it can affect very strongly the
tax burden of countries with relatively higher rates of taxation. So, corporations can dramatically shrink their
taxable incomes in those countries by transferring their profits through the offshore nonresident centers and
some subsidiaries in tax-havens. Thus, as a result of this practice, governments in high-tax areas face a
significant scarce of financial funds that they need for public services and infrastructure. Feld and
Heckemeyer (2011) note that where tax havens are available and the nitty-gritty of international taxation
are not transparent, multinational companies obtain tools towards designing complex tax avoidance
strategies. Those methods usually imply their own world of complicated financial arrangements as well as
inter-company transactions being held just to boost the advantages of the law of a number of countries.
Among the frequently applied methods of profit shuffle are the intellecutal property transfers, intra-group
loans and the distribution of expenses among the company divisions to these preferred countries. Crafting
sophisticated strategies like these with the help of professional tax and financial experts will be within the
reach of large multinational companies, that stay ahead with a competitive advantage, that just fuels the
inequalities in global tax system. Dyreng et al. (2010) indicate that executive's decisions may have a huge
influence in the organization while deciding the taxes avoidance as their decisions are normally crucial and
thus may cause tax avoidance to the extend of evasion of tax which is very dangerous. Professionals who
have specialization in the field of tax law and who can withstand risk pretty much tend to be often involved
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in the undertaking of complex tax planning. The tax auditors of these multinational firms can empower the
company with innovative schemes of tax avoidance which help in saving the taxes to a significant extent
and as a result their company's financial performance gets improved and their compensation may also be
linked to company's net profitability.
3.4 Regulatory scrutiny and public backlash
Resorting to strong regulation supervision and public wrath are undoubtedly the major downsides of
pursuing the aggressive tax avoidance ways. Regulatory bodies, on the global scene, are cracking down on
illegal financial transactions by enhancing the reportage norms, as well as by tightening the transfer pricing
regulations placed globally. Desai and Dharmapala (2009) state that companies might be more likely to
avoid actions that could be seen as tax avoidance if they perceive more frequent trips by the tax authority
across the corporate radar and potential penalties. Governments are tackling this challenge by setting up
policies such as the OECD's Base Erosion and Profit Shifting (BEPS) initiatives, which primarily sem seeks
to close the corners through which the profit shifting and tax dodging via this legal loophole are facilitated.
Such methods include extensively accounting for the income of the countries where profits are earned,
tightening up transfer pricing documentation requirements, and imposing anti-avoidance provisions that are
meant to prevent the abuse of tax treaties. On top of all this, public opposition to what they consider to be
tax avoidance by big corporations may lead to a net loss of goodwill and investors' and clients' trust. This
movement of transparency has gathered in higher trim, fill it up with the companies members and the public
are now calling for visible exposure to the tax activities of the corporationsThrough the aforementioned
research, Dyreng and others point out that tax practices have become more visible, this is heavily
influenced by investigative journalism and activism that has led to more awareness and criticism around tax
affairs of corporations. Urged largely by the public inquiries in the media that came with the revelations in
the Panama Papers and the Paradise Papers, these tax avoidance scams exposed have sparkled interest
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and demands for reform. Authors Feld and Heckemeyer (2011) believe that this situation leads to various
laws to sealing the loopholes and making these haven less appealing. Countries are partnering more often
to freely share tax data and coordinate their tax policies in order to prevent corporations from evading
various tax obligations. Countries are actively looking to use technology to secure better tax compliance.
These policy reforms can make the financially sound tax avoidance options more unlikely and various ways
of doing that more risky for firms.
4.0 Ethical Dilemmas and Corporate Social Responsibility
4.1 Balancing profitability and stakeholder interests
The need to strike a balance between being profitable while catering to different stakeholders' expectations
is considered the key difficulty in achieving corporate governance. Tradition is to see other people's opinion
much more important than the greater company value (Freeman & Reed, 1983). The accordance to the
view of this theory states that the main aim of a company is to bring profits for the shareholders, is other
stakeholders considered secondary. But apart from that it is oblivious to the interests and demands of
different stakeholders that is to say, the employees, customers, suppliers, the communities and
environment and that is only the modern perspective (Hill, 2018). This stakeholder approach reflects the
idea that corporations have not only the goal of maximizing shareholder return but that they should also be
aware of the effect on the external stakeholders which is outside the typical business sphere. Believing the
balance here means the matching of business strategies with the social goals common to the society while
ensuring the financial sustainability. Businesses must duly add ESG (Environmental, Social and
Governance) factors to their decision-making process and day to day operations to restore their financial
stability in the short run and manage their sustainability reputation in the long run. The same can be
achieved through incorporating sustainability in business methods, celebrating diversity and inclusion,
using resources wisely hence making positive impacts to the communities. As documented by Gilson
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(2006), controlling shareholders can be the key element in the process of corporate governance dynamics
since they often have a conflicting relationship with the interest of the minority shareholders or other
stakeholders. In firms where the largest shareholder who holds the most significant vote, it can be possible
that their interests may not be accommodated or they can be ceded to the interests of other stakeholders.
This may result in the practice of governance face issues such as the conflicts of interest, lacking
transparency, and with no sufficient accountability proactively. The implementation of impartial boards that
are made up of diverse people is one of the governance mechanisms that are vital in harmonizing the
desires of the stakeholders and the creation of long term value ( Higgs ,2003 ). Autonomous directors in the
boardrooms ensure multi-pourous ideas and experience which translates to better informed decisions that
cater for all those that have stakes in the company.
4.2 Environmental and social impacts of operations
Corporate governance must be geared towards mitigating, or better, minimizing the environmental, and
social consequences caused by business activities. In parallel, today there is more to be demanded from
companies with regards to transparency and divulging of how their companies may be involved in climate
change, pollution, labor practices, and community welfare (Freeman & Reed, 1983). This trend is a result of
a growing awareness that businesses activities are always interrelated with the health of society, as well as
the risks and opportunities pose to the environment and the communityWith numerous pressure factors
acting on both the suppliers and producers embracing environmental and social responsibilities are
gradually regarded as a core strategy of the business aiming at meeting the increasing environment and
social demands (Hanlon and Heitzman, 2010). Businesses are coming into the realization that beyond just
the avoidance of risks, the integration of sustainable practices also generates value by enhancing a brand’
reputation, attracting employees and in the long run, customer and community relationships. Due to this, a
step has been taken to the add on of the schemes like CSR programs, sustainable supply chain
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management, and stakeholder engagement which are directed towards taking care of the environmental
and social problems. Companies with a global presence are both operators under and adapters to draw
from diverse cultural norms and regulatory backgrounds which make them face environmental and social
challenges unique to themselves which have to be balanced alongside the need for competitiveness and
profitability (Hill, 2018). Such firms, in their turn, have to proceed with their activities in the environment,
which can be represented as a complicated web of different legal standards, cultural canons, and other
standards, and as a result, they should define a self-made corporate governance policy. The efficient
governance arrangements which help in establishing risk assessment frameworks, as well as, transparent
reporting practices and the stakeholder engagement strategies have the potential to build environment and
social considerations into the multinational corporate business operations. The evolution of corporate
governance environments should focus not only on the expansion of the environmental and social factors
for the boards to consider. The boards of directors act as governors which ensure that the corporate
environs takes the shape they wish for, strategies are implemented properly and management is kept in
check for performance related to environment and societal matters. The inclusion of environmental and
social metrics in performance appraisals and remuneration schemes for board members will serve as a
catalyst for management to make sustainable development and social responsibility the top priory in
decision making processes.
4.3 Transparency and accountability in reporting
The pillars of adroit and integrity corporate management are transparency and accountability in reporting.
The multi-stakeholders including the shareholders and management depend on precise information to
analyze the performance as well as risk and impact of the company (Gilsen, 2006). This type of information
is made up of Accounting Statements, Annual reporting, Sustainability reporting and other types of
company-oriented communications, that bring to the awareness the performance of the company, its
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solvency, and compliance with ethical norms. Through her case study presented in (2003), she strongly
believes in the non-executive directors’ performance which sees to it that their organisations practices are
open and responsible. Other than executive directors, who are part of the management, the non-executive
directors have the important duty of overseeing the processes of financial reporting and auditing to identify
any potential loopholes that may conceal illicit activities. At the same time, they might also challenge the
decisions of the management whose interests do not necessarily conform to what is good for the company.
Disclosures, transparency, and financial services standards are the several regulatory frameworks used to
ensure that investors and other involved parties make an informed investigation on the subject (Hanlon &
Heitzman, 2010). But, the sharing of information will be an on-going process as the corporation will need to
be transparent in its operations and ethical in how it conducts business, frank in its communication with all
stakeholders, and active in its efforts to address stakeholder concerns (Freeman & Reed, 1983). While
corporations need to engage proactively with key stakeholder groups, elicit feedback, and address
concerns honestly, the issue of trust building and maintaining can be resolved. This requires that
companies make revealed the particular aspects which includes impacting the environment and also,
society issues, their corporate governance practices, executive compensation, and other matters that are in
the public interest. For a lasting significance to the firm both for the enterprise and the interest of all the
stakeholders, the fundamental concepts of transparency and accountability should always remain at the
core of the process.
4.4 Promoting sustainable and ethical practices
The main target of today’s modern corporate governance is to ensure that the sustainable and ethical
protocols are observed. Freeman and Reed (1983) have argued for a stakeholder-oriented point of view in
which ethical issues are evaluated in accordance with the effects of business choices on all who could
potentially be affected. The view gives highlights the need to adhere to the zero tolerance policy,
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internalized value of fairness and able to apply social responsibility where necessary. It provides an
indicator who companies do not only consider to pursue employee benefit, customers happiness, supplier
security, community welfare, and the environment. Gilson (2006) points at governance patterns and
equipment as substances which make social responsibility by management possible and these ethical
standards a reality. Ethical framework governing style, i. e. , comprising of diverse and independent boards,
transparent reporting and robust internal controls, are highly recommended as a part of decision making
process checks and balances system as well as accountability for the management’s unethical behavior.
Businesses nowadays like to have their own code of conduct, a set of ethics that binding the organization,
and sustainable framework which making them able to demonstrate that business environment
improvement (Hill, 2018). These norms serve as provision of a compass for businesses when they are
faced with such ethical dilemmas, allowing them to manage risks and take advantage of opportunities that
are coherent with sustainable development goals. Furthermore, incorporating sustainability in the corporate
strategies will be not only minimizing risks, and will be as well maximizing reputation and long-term value
creation for shareholders and society as a whole. Considering environmental, social, and governance
(ESG) in their strategies and operations, the companies can stimulate innovation, develop a trusting
community in the society, nurture ecosystems and they all contribute to people and nature’s health.
However, in reality the attribution of sustainability and ethics to corporate governance is a moral and
strategic imperative for those companies that want to stand out of the crowd and successfully face the
changing environment nowadays.
5.0 Mitigating Agency Problems in MNCs
5.1 Aligning incentives and performance-based compensation
lncentives for good performance and right corporate governance should be totally congruous. Theorists
Jensen and Meckling (1976) states that manageral behavior depends on the way they are compensated by
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organization performance. In other words, the higher the link between executive compensation and firm
performance, the more managers tend to act in their own interests rather than the firm's interests.
Executives' incentives are reinforced with the performance-based remuneration, including stocks and
bonuses as they are directly linked with the targets implementation, which leads to the creation of
shareholders’ value. This match is pivotal because it will be the channel through which senior officials
express their appointment in shareholder wealth development and the organization’s long-term prosperity.
Kanagaretnam and other researchers mentioned how auditor quality might make a difference when
monitoring and restraining the conduct of tax aggressiveness by them and that auditors should not be
tempted to get gifts from outside and compromise their independence. The link of compensation to the
performance metrics would ensure that CEOs abide with the responsible tax strategies and stay reliable
with the regulations set by the standard board. While avoidance of unwanted consequences is very
important to ensure short-termism and excessive risk-taking are prevented, which may pose a threat to
long-term saving, clever design is crucial (Johannesen and Zucman, 2014). Given a structure wherein
executives’ compensation is linked to short-term achievements only, they may opt for short-term potential
gains more so than the solid creation of value in the long termMoreover, performance risks due to
excessive risk-taking associated with the functions can lead to credit and financial risks; the stability of the
company is threatened. Hence, businesses are left with the task of finding a suitable midway point where
they can motivate performance while retaining responsibility for the risks that they undertake. Through the
making sure that companies share financial performance interests with other stakeholders, accountability
and responsible business can be built in this process.
5.2 Enhancing corporate governance and board oversight
Improving the governance in business and building the supervisory capability on boards are necessary to
ensure their responsiveness and minimize the agency confrontations. Jensen and Meckling (1976) sees
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the board of directors as central in the monitoring and ensuring shareholders' interest and the efficiency of
management. A healthy board, which comprise of the independent directors with varied knowledge, can
give whether oversight is effectively done as well as planning the strategies of the place. Theses
independent directors who are appointed from outside the organisation are often different and with these
they bring their independent views, in-depth knowledge and well, objectivity to the consideration of
management decisions, and in the way that shareholders dreams are always maintained. In their report,
Kanagaretnam et al. (2018) pointed out that precision of corporate governance mechanisms, like
independent board and effective audit committee, results in firms' varying tax aggressiveness. An Audit
committee and board independence with strong status can is always better well-positioned to oversee
financial activities, spot incidence of misreporting and observe all tax norms thereby decrease the risk of
scandals and controversies regarding taxes. They further show (Johannesen and Zucman, 2014), the
significance of the divergences in institutional frameworks spanning among the countries which affect the
policy and regulatory environments. The modes of enforcing corporate governance mechanisms and the
level of accountability within firms are affected by variable legal regulation, cultural norms, and degree of
state regulation. Companies that are franchising in various legislative institutions face the dilemma of the
institutional difference and they must adapt conformity to these differences in order to mitigate the risk of
noncompliance and to keep up the ethical standard. Through these principles of sound corporate
governance, shareholders' interests are preserved and also sustainability of business methods is
encouraged, whilst reputational resilience is being reinforced and long - term value drawn continuously.
5.3 Improving transparency and disclosure requirements
Transparency, openness, and integrity within a corporation strongly affects consumer confidence. Diligence
should be strengthened with more enlightening disclosures in order to promote better corporate
governance which is either transparent and accountable or both. Jensen & Meckling (1976) argue that the
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openness development provides to both managers and shareholders the chance to equally flows
information, eliminates agency costs, and thus would improve the efficiency of the entire market. Adequate
and unbiased information such as the firm's financial statements, asset disposal details, governance
practices and risk assessments can foster more detailed analyses by investors. Consequently, the
likelihood of agency conflicts can be punished and shareholder value can be enhanced. According to
Kanagaretnam et al. (2018). , auditor quality is an indicator that leads to higher levels of tax transparency
that is proved by audited companies tax disclosures. Auditors, through the best audits, do their jobs as
providers of assurance that the financial statements of entities are comprised of the facts and truth and thus
are trustworthy and reliable. Besides, what is so vital is the fact that by Johannesen and Zucman (2014) the
coordinative efforts at the international level have gone a long way in coming up with the new ways which
involve the setting of disclosure policies so as to prohibit the tax evasion and avoidance issues. Due to the
leading role of a global economy in the last few years, the necessity to manage different national and
international jurisdictions' reporting regulations' emerge. It is one of the ways of the undermining tax
legislation's effectiveness. Therefore, it is international cooperation that is at the centre of the issue not only
to define common reporting standards but also to promote the implementation of the Anti-Money
Laundering and Combating the Financing of Terrorism (AML/CFT) measures in order to pursue financial
crime activities. Companies should implement and surpass stricter reporting standards with all financial
documents disclosed. Risks will be flagged, governance structures will be assessed and stakeholders will
be informed. The principle guiding companies should be simplicity, to define the base of their
trustworthiness. Broad communication that involves all the stakeholder interests fosters the positive
corporate image because companies can be held accountable, as they strive to generate more funds. The
imparting effect comes when verification is done to prevent market opaqueness, integrity, and long term
market sustainability is enhanced.
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5.4 Adopting ethical codes and accountability measures
Instituting ethical codes and brake lines are imperative for the development of the integrity as well as the
responsible corporate governance behavior. As Jensen and Meckling (1976) indicate, managers must be
motivated and they should be in alignment with the ethical standards so that both parties to be happy
during conflicts and management rent-seeking behaviors. As compensation schemes for the managers are
tied to ethical conduct and creation of value over the long term, there is a likelihood of them considering
how it will influence the short-term decisions rather than the long-term interests of shareholders. It can be
said that the work of Kanagaretnam et al. (2018) makes it possible to explain the positive relationship
between auditor quality and businesses' compliance with ethics and corporate governance. Top-quality
audits offer an independent confirmation audit that guidelines of financial statements exactly present the
firm's financial situation and performance which in turn gain the investors' confidence and the integrity of
market. Johannesen and Zucman point out the essentiality of regulatory frameworks and enforcement
mechanisms that serve to aid ethical practice and crack down on financial misdeeds. Regulatory framework
with strong supervisory capabilities and strict enforcement mechanisms should enable the oversight, and
ensures the compliance of ethic standards, and laws. The companies must set up transparent and definite
ethical standards, codes of conduct, and whistleblown system as it will escalate ethical behavior and
subsequently maintain accountability on personal as well as corporate levels. Ethics codes are based on
the principles and values that machinery the behavior of the employees as well as determining the ethic
that governs the totality of the business conducts. Hence, it sets clear expectations for the machine that
guides the behavior of companies and employees, including honesty, integrity, and respect for all
stakeholdersWhistleblower measures constitute mechanisms whereby employees can sound their
concerns in a confidential manner without the fear that their jobs will be jeopardized. The treatment of
ethics as integral component of corporate culture and governance can help in earning the trust of
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stakeholders, improving a business reputation, and establishing a sustainable value level for all of the
involved parties and for all the society.
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