There’s a growing consensus that companies need strong, independent boards full of qualified directors if they are to sidestep risks and seize opportunities in our complex and dynamic international economy. Being generally “impressive” is no longer enough—investors and corporate watchdogs expect a well-defined rationale for each appointment, an articulation of how the board member will provide meaningful oversight and counsel on critical issues.
One of the most important of those issues is, of course, globalization. As Egon Zehnder’s just-released 2014 Global Board Index found, 37% of the revenue generated by companies in the S&P 500 now comes from international sources, an increase of 5.5% since the index was first developed in 2008. Only 28% of the S&P 500 still generate all their revenue in the United States.
But are the boards of these companies similarly “globalized”? Do nominating committees recognize how difficult it is for even the most seasoned and sophisticated executives to think outside of their “home culture”? Have they made a concerted effort to appoint directors from other countries or with extensive work experience abroad to provide the board with a global perspective and help it steer clear of parochialism? Unfortunately, the answer is not yet.
According to our data, only 7.2% of S&P 500 directors are foreign nationals, and only 14.1% have had meaningful international work experience. To be sure, this represents an improvement over 2008, when those figures were 6.6% and 8%, respectively. But boardroom diversity had not kept pace with the demands of international business activity.
Indeed, we found that even at the 100 most globalized companies—those that derive more than half of their revenue from non-U.S. sources—the numbers barely improved: Only one of ten directors is a foreign national, and only two of ten have meaningful international work experience.
To examine differences between sectors, we also developed the Board Global Capability Gap, which measures the difference between a sector’s global representation in the boardroom (again, the percentage of directors who are from outside the United States or have spent significant time working abroad) and the sector’s global footprint (the percentage of corporate revenues that come from international sources). The bigger the gap between the two figures, the further boards have to go.
Overall, we found gaps between 16% and 27%, and when we filtered the data to include only companies with international revenue—that is, those with the most to gain from foreign nationals or those with international experience in the boardroom—the range was 20% to 29%, as shown below. Technology, with a gap of 44%, was the outlier—not because the global presence in the boardroom is so low, but because the percentage of revenue from international sources is so high. Neither Utilities nor Telecommunications are represented in the chart below because all but a few companies in those sectors have no non-domestic revenue.
Our conclusion is that the challenges of globalizing the boardroom transcend sector specifics and have more to do with decision-making biases in the process of managing board composition. Based on our work with nominating committees and our observation of corporate governance practices, we believe there are three major impediments that prevent boards from being as global as they should be:
Complicated logistics: Having international representation on your board in all likelihood means appointing directors who live in different countries. Time zone differences and travel schedules complicate the process of communicating, via phone or in person, causing boards to either consciously or unconsciously shy away from globalizing. Technology (video conferencing, collaboration tools and so on) eases some of the burden, but some if these difficulties will simply have to be accepted as as part of the price of doing business in the global economy.
Limited networks: The professional networks of most U.S. company board members are naturally weighted toward domestic contacts. Nominating committees can overcome this by making a deliberate effort to tap into a broader talent pool during the director candidate identification process.
Inadequate succession planning: Thorough succession planning is a well-established (if not always followed) best practice for senior level talent, but it has yet to make its way with the same force into the boardroom. Because of this—and because of the fact that board turnover, by design, tends to happen infrequently—most nominating committees end up take an ad hoc approach to filling director seats. This needs to be replaced with a more strategic approach, including tracking potential director candidates, especially those with global experience, earlier in their careers.
It’s important to remember that there is no one-size-fits-all solution, no prescribed level of global expertise in the boardroom we recommend. But we hope these findings stimulate fresh discussion within companies, boards and nominating committees about the global capability of their directors and how it dovetails with the footprint of their business—both now and into the future.
