Foreword

THIS

HIS REPORT LOOKS at the financial control of multinational operations from the point of view of the chief financial officer for a company's international activities.

The Financial Executives Research Foundation was fortunate in enlisting as members of the research study group two of the outstanding scholars and teachers of the subject, experienced also in helping to install, improve, and in some cases administer financial control systems either as consultants to multinational operations or as members of their executive staffs. These two men, Professor John Dearden and Associate Professor David Hawkins of the faculty of the Harvard Business School, conducted the major part of the research and wrote the body of the report. Professor Dearden wrote most of Chapters II, III, VIII and IX; Professor Hawkins, Chapters IV, V, VI and parts of several others.

The study was planned and conducted under the supervision of Professor Edward C. Bursk, Chairman of the International Management and Marketing Group of Boston and Editor of the Harvard Business Review. Professor Bursk also edited the report and participated in the analysis of the questionnaire results. Mr. Victor M. Longstreet was Project Director, and took a leading role in formulating the questionnaire and analyzing the returns. The material in Appendices B and C was prepared by F. Robert Madera and Cedric L. Suzman, respectively, both doctoral candidates at the Harvard Business School.

The information used in this study has been gathered in several ways:

1. A 36-page structured questionnaire mailed to the top financial officers of 98 multinational corporations, comprising the complete list of those members of the Financial Executives Institute that publish in their

1

annual reports separate figures for at least some aspects of their foreign operations, as well as a few companies selected by the research group as desirable additions. The response was good; 41 replies-a return of over 40% -were received. (The companies represented have total sales of over $70 billion.) However, for most of the analysis, only 34 returns have been used, since the rest were incomplete.

2. A companion 21-page structured questionnaire which each company was requested to forward to two of its foreign operations that, in its judgment, best typified the company's financial control system. Replies were received from 53 subsidiaries.

3. Direct interviews by Professor Dearden and Professor Hawkins with the officers and staffs in 12 of the company offices in the United States and abroad.

4.

Four seminar discussions in different parts of the country, three of which were a part of the programs of the regional meetings of the Financial Executives Institute in 1969. These sessions were attended by a total of 80 members, only several of whose companies were included in the questionnaire survey.

5. The advice and consultation of the following members of the Financial Executives Institute appointed to form a special Steering Committee for the study group:

Mr. Edward J. Mack, Chairman

Vice President and Controller

Burlington Industries

Mr. Frank M. Bretthole

Senior Vice President and Corporate Controller

H. J. Heinz Company

Mr. G. A. Costanzo

Executive Vice President

First National City Bank

Mr. Herbert C. Knortz

Senior Vice President and Comptroller

International Telephone & Telegraph Corporation

Mr. Edmund T. Pratt, Jr.

President

Pfizer International, Inc.

Needless to say, the authors have also contributed significantly from

their close familiarity with the workings of financial control systems in many companies.

The original title. of this study was simply: Financial Control of Multinational Operations. The subtitle, An Exploratory Study, was added after it became clear that the original purpose of producing a definitive study on this subject needed to be broken down into two stages-of which this project represents the first. Much of the data collected in the survey, though not complete or extensive enough to warrant drawing many positive conclusions, can nevertheless suggest to managers many clues to problems, and may suggest to future researchers many avenues of further inquiry that should be fruitful to pursue on a broader basis-what could be the second and definitive stage.

Direct interviews that are more extensive and with more executives and their staffs, especially abroad, would be highly useful (and can be structured more explicitly as the result of this study). The analysis of written comments received in response to the questionnaire could also be followed up productively by direct interviews with those who made the most pertinent comments-a procedure that was not possible within the physical constraints of the current study.

This study has broken new--and fertile ground in an area still largely unexplored. The truly multinational corporation is just beginning to emerge. At the same time many companies are only beginning to operate in the international field. Many of these are planning to expand their foreign operations rapidly, both by countries and by products. They have much to learn in financial controls without much time to learn it. Thus, there is a growing interest and a dire need for further research on this subject.

I

Introduction

MANY

(IF NOT MOST) OBSERVERS AND ANALYSTS of financial control in foreign operations have reached two conclusions:

1] Most companies simply use their domestic systems to control their foreign subsidiaries.

2] These systems, although satisfactory for domestic control, do not work well in foreign subsidiaries.

Our research indicates that the first conclusion is certainly correct. But not the second. (There is another, more important determinant of success, as will become apparent.) The fact is that control systems do not always work well domestically, either. Indeed, every domestic control system that we have observed or read about does in some way motivate managers to take action contrary to the interests of the company. Consequently, we disagree with the conclusion that the principal problem with control systems for foreign subsidiaries is that they are the same, or similar to, domestic control systems; and that if we had systems designed specifically for foreign subsidiaries, our problems would be solved.

There are ways in which the system must be adapted to overseas operations, of course. For example, for strategic decision making management needs a greater input of information about a subsidiary -- greater in scope, in detail, and in frequency. But beyond such exceptions we have become convinced that the problems of controlling foreign subsidiaries are very similar to the problems experienced in controlling domestic divisions, and that the main difference is one of degree.

This is not to say that the difference is insignificant. There are very definite difficulties that stem from the peculiar characteristics of the international environment, and the difficulties are accentuated if such factors are not recognized and dealt with. By the same token, the added difficulties

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of controlling foreign operations are more a matter of the administration of the control system than of its design.

H

Our general findings are:

1] Those responsible for designing financial control systems for foreign operations (and often for domestic operations too) encounter many problems because they lack a clear concept of what the control system is intended to accomplish.

2] Those responsible for designing and administering financial control systems often do not fully appreciate the relevance. of the peculiar characteristics of the diverse international environment to their task.

3] The "style of control" and the organization structure through which the control system is implemented are often

more crucial to the success of the control system than the technical characteristics of the system.

Because of that first finding, we will need first to present a concept of control that will provide those dealing with financial control problems with a basis for better defining their tasks. Then we can go on to describe and evaluate current practices of U.S. corporations in controlling foreign operations, to discuss the peculiar characteristics of the international environment that affect the administration of the financial control system, and to describe the styles of control that executives consider to be successful.

In Chapter VII we will give some indication of the difference between what appear to be the "most successful" and "least successful" companies in international operations-but it will be only some. The reason is that the differences in practices and procedures are very small, as revealed by our research (and we have no doubt that further research would confirm us). And the reason for that, in turn, is that “it's not what you do but how you do it" that counts-the intangibles of management.

Finally, in Chapters VIII and IX we will make recommendations for those who wish to improve their control of foreign operations. If there-or along the way-we seem to be stating the obvious or talking down to readers, believe us, please, when we say that our research revealed the need-even in large companies-for some very fundamental "education" in this area. And if you are among the very few truly sophisticated people, then just thank your lucky stars-or the effort you expended to get that way! For others: the area is complex, and you are not to be blamed for not mastering it as yet. Maybe this will help. We certainly intend it to.