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?