By definition Multinational Enterprises (MNEs) have many subsidiaries operating in or across several countries. How do MNEs control the implementation of policy and practice across subsidiaries? How is compliance monitored and, if necessary, enforced? While she worked as a sustainability consultant for an MNE, Anne Jacqueminet noticed that headquarters commonly have little understanding of how their subsidiaries implement corporate social responsibility (CSR) practices.
MNEs use CSR to ensure that subsidiaries do not just comply with the law but also cultural, ethical and environmental standards. Jacqueminet underlines its importance: “Organizations and multinationals are under particular scrutiny when it comes to CSR,” she stresses. “If there is any misconduct in a subsidiary the entire MNE faces a damaged reputation. They need to ensure that subsidiaries are consistent in implementing the objectives set out, yet formal controls for this are usually very limited.”
Balancing internal and external demands
When considering CSR, a subsidiary is faced with demands from both inside and outside the organization, i.e. from two sets of constituents. Internally, headquarters will set out organization-wide policies with which it expects all ‘internal peer’ subsidiaries to comply. Externally, there are local demands that differ depending on each subsidiary’s location and local environment.
These demands can come from the state, regulators, local communities, suppliers, customers, local NGOs, the media, and even competitors or ‘external peers’. “We wanted to understand the extent to which subsidiaries get torn between these internal and external demands and how and why they choose which CSR practices to implement,” explains Jacqueminet. “The question is: who do they pay more attention to and why?”
The effect of ‘peer conformity’
Jacqueminet hypothesized that a subsidiary will be most affected by the set of peers that it perceives poses a greater threat. If its internal peers within the organization conform to corporate policy, the subsidiary in question will most likely follow suit, which results in enhanced attention to HQ’s demands, and ultimately increased CSR implementation. As Jacqueminet explains, “They are threatened by their internal peers and want to show HQ that they are conforming, that they are the ‘good kid’ at school.”
However, if it is the subsidiary’s external peers that conform to the CSR demands of the local environment, the subsidiary will likely adopt the alternative practices demanded by external constituents. Here, the external peers are most threatening and the subsidiary has to adopt local practices to keep up with the competition. Jacqueminet also had the notion that the attention of a subsidiary is limited – it gives priority to certain constituents at the expense of others – so if it pays more attention to the demands of one set of constituents, it will consequently decrease the attention it pays to the other.
When a subsidiary feels threatened by its external peers, the CSR demands of the local environment were upheld at the expense of those from HQ.
The implementation of CSR practices by MNEs is notoriously complex and difficult to observe because MNEs are so large, and subsidiaries face many competing demands. “There are many diverse issues under the CSR umbrella,” Jacqueminet remarks. “When you look at CSR conformity, there is a lot of heterogeneity within an organization. It is hard to see what drives subsidiaries to conform.” With this in mind, Jacqueminet narrowed her investigation to subsidiary implementation of health and safety, gender diversity and environmental biodiversity practices. These are three CSR practices of key importance to the energy and environmental sector associated with the particular MNE in question.
Compliance with HQ drives initiative
Analyzing questionnaire responses from more than 300 subsidiary managers, Jacqueminet and Durand were able to conclude that when a subsidiary feels threatened by its external peers, the CSR demands of the local environment were upheld at the expense of those from HQ. “Interestingly, however, when the threat comes from their internal environment, not only do subsidiaries conform to the demands of headquarters, they also increase their attention to the local demands,” says Jacqueminet. They find new ideas and show initiative, which is highly valued by headquarters.” This goes against the idea that subsidiaries have limited ability to focus their attention; in fact, they can pay attention to headquarters and the local environment simultaneously. Jacqueminet concludes: “This study has confirmed that subsidiaries are greatly influenced by their peers when it comes to CSR implementation. But we have also been able to show that subsidiaries are not passive recipients of demands or mere imitators of their peers; they actively choose to allocate their attention and this depends on their competitive environment.”