Board Consulting

What a difference a few months make. We decided to undertake our Global Board Index survey long before the current economic crisis. But if we ever needed something to underscore and add an exclamation point to our long-held view of the necessity of a global board, we now have it. Our study confirms that the boards of large, public companies — the vast majority of which derive a significant percentage of their revenues from international markets — still have boards that are not nearly as global as their current business or aspirations. This deficit matters.

It’s not just that business is increasingly global and that boards need directors with the background, experience, and knowledge in these markets they have targeted. While this all still holds true, there is now far greater urgency to getting the board right. It is the growing realization that everything is interrelated and interconnected, as we have witnessed most recently with the volatility in the financial markets. And the dramatic change we have been experiencing will likely alter many assumptions about doing business forever. 

One lesson driven home by the current economic situation is that business today is inescapably global, and if more companies don’t begin to recognize that reality and apply it to the composition of their boards, they may be left in the dust. As a global firm ourself, for years Egon Zehnder International has been sounding the call for aligning boards with a company’s global strategy, and it has only made sense to ensure that important markets and customer segments are represented on the board. 

There is now far greater awareness and pressure to ensuring that the board comprises the diverse views required to serve as a company’s advisor and source of local intelligence around the world. We see dramatic current cases in point illustrating that geographic boundaries are increasingly meaningless when it comes to business. Change in one part of the globe creates ripple effects, consequences that are felt everywhere, and you are shortchanging your company’s future if you are still only viewing the world through a U.S. lens. Without international directors on your board to expand your vision and provide essential input into discussion and decision making, you risk becoming myopic. And that means losing sight of the land mines as well as the opportunities ahead in the rapidly changing landscape of global business.

Determining what international resources you require on your board is part of a rigorous process that should be carefully tailored to your company and its unique strategy. The board should start by assessing the skills and experience of your current directors, then evaluating that talent against your current strategy. How does the board measure up? If there is a significant gap, you are not alone, according to the companies we surveyed, as well as the anecdotal evidence we see every day in our work with clients. But boards that want to build the most capable resources possible, to enhance their competitive advantage in a fiercely competitive global marketplace, will focus on closing this gap by identifying and recruiting the international directors who are the best match for their board. 

It’s important to recognize that the very definition of what it means to have international representation on a board has evolved in recent years. It used to be sufficient to have a director representing a market of interest to a company who had been educated or done a work stint in that market. But we now realize that the true value of the international shade of diversity — or of any other shade — is the contribution to diversity of thinking on the board. That entails going beyond simple, surface criteria in director recruitment to identify directors with a global mindset, who can help the board expand its view of the world. And this global mindset is a result of having been steeped in a culture, rather than something acquired living as an expat or participating in a program at a foreign university. In fact, the international directors we analyze in our study appear to be a different breed of foreign national, with far deeper and wider international experience than their U.S. director counterparts. These are the sorts of directors who, while not easy to attract, add tremendous value. 

But perhaps the most compelling argument for diversity, specifically in the case of international directors, is a quantifiable business reason: while we cannot yet pinpoint the causal links, there is a correlation between companies with international representation on their boards and better business performance. We tread carefully, until more research explains the “whys” and the “hows,” but we can observe that those S&P 500 companies where foreign nationals represent 30% or more of the board appear, on average, to have performed better on key business indicators over the past three years than the overall S&P 500. 

Boards must seize the opportunity to build the team of directors required to confront the challenges, opportunities, and turbulent waters ahead. During the course of this process, boards should be brutally honest with themselves about the resources they have and what they will need to ensure the success of their global strategy. If various Asian markets, for example, are crucial to your strategy, don’t assume that the Asian “base” on your board is covered because you have a director who spent two years working for a global company in Hong Kong. That experience won’t necessarily count when it matters. You need on-the-ground, homegrown expertise in these markets, specialized to align with your strategy. And be careful to acknowledge distinctions among the many diverse Asian cultures: that experience in Hong Kong may not be all that useful if you are focusing on India.

Boards must position themselves for what promises to be a bumpy ride ahead. This is a time for some soul-searching, honest evaluations, and specific plans to realign key resources, like those on the board, to ensure that you are in fighting shape to compete. At its best and most effective, this is an “evergreen” process: repeated and refined on a regular basis, much like the strategy that serves as a backdrop.

This article is part of the Global Board Index by Egon Zehnder International. The complete study can be found at www.egonzehnder.com/global-board-index.