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Three years ago, the board of directors for State Street, the Boston-based financial services firm, was decidedly local. Not only was it lacking any international members, but every one of its 14 directors lived within the general confines of Beantown. By then, the company’s international revenues were nearly 40%, with the goal being to reach an even split. “We felt it would be prudent and smart to begin to think about the mix of the board,” says David O’Leary, executive vice president of human resources for the company. Setting its sights on non-U.S. passport holders with greater financial services experience, the board added three European directors in late 2006. (One of them has since become the company’s chief risk officer.)
In an attempt to diversify, boards have long sought to add women or minorities to their ranks. But as U.S. markets slow and global revenues become more critical than ever, they’re increasingly seeking foreign members or directors with significant international know-how. “It’s an emerging area,” says National Association of Corporate Directors president Kenneth Daly. “There’s a lot of interest in foreign companies having U.S. directors as well as U.S. companies wanting foreign directors.” Bart Friedman, a partner with Cahill Gordon & Reindel, who advises boards on governance matters, says he sees the interest doubling each year. “I’m not aware of a board that hasn’t at least thought about the issue.”
Still, boards are a long way from looking anything like mini-U.N. delegations. According to a comprehensive new study by executive search firm Egon Zehnder International, less than half of the companies in the Standard & Poor’s 500-stock index have a foreign national on their board, and only 17% have two or more. Just 27% of all directors serving on boards in the S&P 500 have meaningful international experience, which Egon Zehnder defines as those who’ve had a senior post outside the U.S. and Canada or responsibility for foreign operations. Too many directors, says Egon Zehnder partner George L. Davis, “think they know global markets yet only travel overseas a few times a year.”
While the advantages of a more global board are obvious—opening doors in untapped markets, offering local regulatory wisdom—the challenges of doing so may be less apparent. Some companies may be subject to regulatory obstacles. Until earlier this year, Swiss companies had to have a majority of Swiss directors on their boards; alternate compositions required a waiver. Novartis, which has three Germans, three Americans and one Brit on its 13-member board, sought such an exception in the past. Being more global, says board member Srikant Datar, “brings a different outlook to the entire discussion of the board.”
Navigating diversity optics—what some have dubbed “the annual report” effect—also poses dilemmas. Davis recalls a major chemical company client that chose a Chinese director with experience limited to the mainland over a white German director who’d worked across Europe and in five Asian countries, including China.
Cultural conflicts are bound to flare up, too. On one Silicon Valley board, Davis recalls, the “go-go Palo Alto types” gave poor marks to a reserved German director on the board appraisals members must give each other under Sarbanes-Oxley rules. “They were dinging him when his contribution and content was actually higher than the others’.”
Current and former CEOs see a huge value in having a more global board, despite these challenges. “This summer I wanted to get to know [more] people in the business world in Europe,” says Western Union chief Christina A. Gold, “just to get a flavor of some of the markets.” To do so, she turned to international members of her board. Former PepsiCo CEO Steve Reinemund, now the dean of the business schools at Wake Forest University, says having global representation isn’t important because “it’s politically correct, but because it’s really important for good governance, for understanding the marketplace and understanding the consumer.”
Of course, boards aren’t given overhauls often, so changing the international make-up of boards will take time for many companies. Mastercard, which has one of the most global boards in the S&P 500, revamped its board in 2006 when it filed its IPO. With roughly half of its directors living outside the United States-including Beijing, Hong Kong, Milan, London and Mexico City—the difficulties of coordinating travel schedules outweighs any potential cultural differences. Says the company’s general counsel, Noah Hanft: “Logistics is probably the most challenging thing.”
For a list of the most global and least global boards, which uses data from Egon Zehnder’s study, click here.
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