| There is a new issue in the
corporate governance debate: should company boards be
international?
It is prudent that it is now time for boards to make
themselves more international. They need to do so in
order to understand and be understood by their investors,
markets, suppliers, stakeholders, employees, and management.
THE PROBLEM
In the 1980s, the sourcing of goods and services became
global, then, in the 1990s, management developed into
a global market, and managers were drawn from a pool
of international talent. In the 21st century, international
companies sit at the centre of a network of interests
connecting suppliers, customers, stakeholders and shareholders
of many different nationalities. Yet often the boards
of such companies are not international. It is believed
that they run great risks in remaining mono-national.
There is a disconnection between
the international strategy of global companies
and the make-up of their company boards. For example,
48% of the Fortune Global 50 companies have no foreign
directors on their main board, only 16% have one foreign
director, and 18% have two. Revenues tell a different
story, with 57% of the Global 50 deriving 20-80% of
their revenue from abroad. There is a mismatch between
board representation and revenue source; there may also
be a mismatch between board
representation and investors or stakeholders.
In the US, several Global 50 corporations, including
ExxonMobil and Boeing, have all-American boards, despite
having 70% and 33% respectively of their revenues outside
the US. In March, Boeing appointed a diplomat to move
its business from a “US-centric company”
to a global one. Boeing now has country heads –
below board level – in China, Japan, Korea, Russia,
Germany, Spain, Italy and Turkey.This is not solely
a US problem. Asian and European company boards reflect
a similar home nationality bias. Toyota is a good example:
almost two thirds of its vehicle output last year sold
outside Japan. It has an all-Japanese board, but, in
April, appointed two Americans as "managing officers,"
the first non-Japanese.
Of course, some companies – HSBC and Goldman Sachs,
for example – know that to have a global business
you need a global board. At the management level too,
companies have been prepared to look internationally
for CEOs. Today in the UK, 10% of the FTSE100 companies
are run by non-nationals , compared with 2% in 1993.
Where management goes international, boards must too.
It's predicted that greater diversity in their workforce
and management will, either by culture or by regulation,
become an issue for boards and how they are perceived.
WHY CHANGE?
Companies should now weigh the considerable risks of
not having international directors against the rewards
of having them. Investors, regulator and stakeholders
are now looking at boards with a critical eye. Things
are starting to change as companies realise that an
international board is a competitive advantage and an
attraction to investors. UK and US companies, with their
developed governance structure, have an opportunity
to lead the way. If company boards do not internationalise
themselves, someone else will do it for them.
But what are the obstacles to change? Why are companies
ignoring a vital part of structure and strategy? It
can be hard to find people whose schedules enable them
to attend regular monthly board meetings across the
Pacific or the Atlantic. Moreover, until the mid-1980s,
there were few truly multinational companies outside
the oil and financial services industries, and a consequent
dearth of talent. But with the growth of cross-border
business, there is now a cohort of Europeans, Asians
and Americans who have the time and the expertise, and
who are at ease working in a multi-cultural environment.
Global companies should now look to these people to
bring the same cultural diversity to their boards as
they already have in their workforces. Granted, not
all companies have the facility – emotional and
commercial – to integrate foreign nationals at
board level. These companies need to develop higher
cultural sensitivity and deeper integration skills.
The ability to see through the eyes of individuals from
a different cultural background is a critical strength.
THE SOLUTION
What should now be done? Good governance is all about
finding the right people at the right time. Greater
shareholder and stakeholder activism will begin to press
companies, both nationally and internationally, to change
the make-up of their boards. Regulators are getting
interested. In the US, the SEC has started to look critically
at corporate boards; it may well be that shareholders
will be given access to corporate proxy statements in
order to nominate their own candidates for the board
of directors. Greater transparency and accountability
will drive this movement forward, and change the rules
by the next proxy season in 2005. Where national regulators
lead, international opinion follows.
Now is the moment to go international.
We think this for four reasons:
First investors like balanced and diverse boards. Investors
are prepared to pay a premium for well-governed companies.
That premium increases with foreign investment. A representation
of foreign nationals on a board would reduce perceived
risk and therefore the premium for investment.
Secondly, it's believed the right foreign nationals
can contribute greatly to company strategy at board
level, and provide a better understanding of the global
environment. A major European telecommunications company,
for example, appointed six CEOs for its US subsidiary
in eight years: they might have done a better job at
hiring with an American director on their board.
Thirdly, foreign nationals on the board indicate a commitment
to global expansion. Conversely, boards composed only
of home nationals discourage talented non-nationals.
If a global company claims to be world-class, then it
should be prepared to search globally to recruit its
board of directors. Where management talent is drawn
from a global market, it should also be for board directors.
Fourth, depending on the sector, management and CEOs
need both counsel and support from foreign nationals
on their boards. This is true for non-national CEOs
but especially for home-grown CEOs whose operational
expertise must be augmented by an international outlook.
Many companies are run not just by national CEOs but
by CEOs promoted from within the company.
Questions for Company Chairmen
- Does the make-up of the Board
reflect the geographic diversity of our business?
- What do our foreign investors
make of our Board? Does it reflect or represent their
diversity? What does the composition of our Board
signify to foreign employees, recruits and business
partners?
- Can the Board support a non-national
CEO, or can it offer informed international perspective
to a home-national CEO?
- Would the addition of (more)
foreign nationals add to the Board’s understanding
of the business environment in regions we have targeted
for expansion and could they open new business opportunities
in their particular region?
- How confident can we be that
we have seen the widest possible talent in recruiting
directors to the Board? Have we been rigorous and
systematic enough in our search?
- Have we done enough to integrate
and make best use of the foreign nationals on our
board?
|
