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Western companies, especially tech multinationals like SAP and Nokia, have begun looking to Asia's emerging markets for their next board leaders
In its nearly four decades of existence, SAP (SAP) has been a bastion of German business. The country's largest technology company employs more than 15,000 at home and is the eighth-largest component of Germany's benchmark DAX-30 stock index.
But SAP is quickly globalizing. In April, the company's highest-ranking American, Bill McDermott, joined SAP's executive board, the equivalent of a U.S. board of directors. On July 1, the company named José Duarte of Portugal head of European sales. In May 2009, Léo Apotheker, a German-born de facto Frenchman who resides in Paris, takes over as chief executive.
Yet even bolder steps are planned. Within the next few years, SAP plans to appoint an Indian or Chinese director to its board, the first time in the company's history an executive who isn't from the West would have a hand in governance. "In the next three to five years, definitely somebody from India or China will be on the board," says CEO Henning Kagermann, sipping tea during a late June interview at SAP's Palo Alto (Calif.) office. "At the end of the day, for our executive board, someone from those two countries could complete it."
Kagermann won't name candidates, but SAP has rising stars in those regions. India Chief Executive Rajan Das moved to Mumbai from Silicon Valley a year ago, and Shang-Ling Jui, the president of SAP's China Labs, was born in Taiwan but holds German citizenship. "We have a few guys who could make it," says Kagermann, who'll step down as CEO in May 2009. Finding the right fit could make SAP even more compelling to customers in India, its fastest-growing market, where revenues are doubling each year, and China, where sales are climbing 50% annually.
Trend Toward Emerging-Market Directors
In an era when manufacturing, customer service, and increasingly, the bulk of new sales are coming from Asia, a growing number of U.S. and European companies are starting to look east to India, China, and other emerging markets for their next generation of board leadership. Goldman Sachs (GS), which is investing in Indian industry, on June 29 named steel magnate Lakshmi Mittal a director. Finland's Nokia (NOK), the largest seller of mobile phones to India, in May 2007 added Lalita Gupte, chair of Mumbai's ICICI Venture Funds (IBN), to its board. And Infosys Technologies (INFY) co-founder N.R. Narayana Murthy joined the board of Dutch consumer products maker Unilever (UL) last year. Novartis (NVS), Procter & Gamble (PG), and Deere (DE) are among the handful of other U.S. and European companies that have recruited Chinese and Indian natives to their boards.
"We're going to see a lot more of this," says Roger Kenny, president of Boardroom Consultants, which is recruiting directors in India and China for at least two large pharmaceutical companies he wouldn't identify. "Clearly there's a trend."
Directors who hail from emerging markets can help Western companies build strategic bridges to business and government officials, navigate bureaucratic and legal thickets, and gauge the impact of decisions made in Cincinnati or Basel on customers in Delhi or Shanghai. Indian and Chinese board members can also stand toe to toe with management on decisions about how to proceed in Asia. "They're looking for someone just as smart" as top executives, says Stephen Mader, vice-chairman at Korn/Ferry International (KFY). "These companies are all glued into China in major-league ways. This is not rookie year."
For SAP, whose software runs the accounting, manufacturing, and inventory systems of many of the world's largest companies, one challenge is globalizing its upper ranks without losing its German identity. While it expands overseas, it's being careful not to cut jobs at home, both to ensure employees' loyalty and to trade on the reputation for German quality. "We are a global company with roots in Germany," Kagermann says. "And you should be proud of your roots.…There's still a good name around 'Made in Germany.'"
Tech Companies Covet Asia Market Insight
Given demand by an emerging middle class of consumers in India, China, and the Middle East for laptops and cell phones—as well as the need for those countries' industries to modernize their computer systems—technology companies are natural candidates to diversify their boards. Hewlett-Packard (HPQ) gets 70% of its revenue from overseas, IBM (IBM) about two-thirds, Cisco Systems (CSCO) 45%. "If you look at the companies we consider American, look at their revenue. They're not American anymore," says Vivek Wadhwa, an engineering professor at Duke University and a fellow at Harvard Law School.
Little wonder tech companies covet board members who know emerging markets, says Heather Bellini, a software analyst at UBS (UBS). "Asia is such a huge growth area," she says. But most of the action so far has been in banking, manufacturing, and consumer products. Ratan Tata, chairman of Indian conglomerate Tata Group, in 2007 joined aluminum producer Alcoa's (AA) board. Turkish executive Muhtar Kent, who became CEO of Coca-Cola (KO) on July 1, had been a director since 2006. And Mukesh Ambani, chairman of oil company Reliance Industries and India's richest man, sits on an advisory board for Citigroup (C), though he's not a director.
Part of the reason is that companies in the U.S.—home to most of the tech sector—can recruit from a bigger pool of potential directors at home. U.S. companies with historically strong international sales, like IBM, Coke, and P&G, have leaned more toward Latin America than Asia, says Charles Geoly, a managing director at headhunter Russell Reynolds Associates. Among all the board seats at the 500 largest U.S. companies in 2006, just 81 were filled by Asians and Asian Americans, according to a report last year by the Committee of 100, a group of Chinese American business leaders.
Seeking Candidates with the Right Background
Indeed, finding candidates with the right experience, wherewithal to endure frequent round-the-world travel to board meetings, and the stomach for Western shareholder activism can be tough, recruiters say. "There's a big difference between what boards would like to do, and see as relevant and important, and what they're actually able to do," Mader says.
Travel can be particularly onerous for directors who need to hunker down for marathon flights a half-dozen times a year or more. And some candidates are nervous about putting their personal wealth at risk in potential shareholder lawsuits, headhunters say. Compounding recruitment is the difficulty of finding emerging-market nationals with the background to serve on Western boards. The average director of a company in the Standard & Poor's 500-stock index is about 62 years old, which means if they have international experience, it's likely to be in Europe, says Julie Hembrock Daum, the North America board practice leader at search firm Spencer Stuart. "The technology they grew up with and the markets they grew up with are different," says Daum, who's recruiting Asians for board seats at Western companies. Executives with the most on-the-ground experience in India and China tend to be midcareer, and not yet ready to get off the fast track for a board seat.
One answer has been recruiting country experts who aren't natives. John Thornton, the former president of Goldman Sachs, teaches at Beijing's Tsinghua University, is an authority on Asian business, and sits on the boards of Intel (INTC), Ford (F), and News Corp. (NWS).
Korn/Ferry's Mader has another idea for overcoming the obstacles preventing Indians, Chinese, and other developing world leaders from governing Western firms. He's recruiting an Asian director for one of the largest U.S. industrial companies, and talking to other U.S. organizations' Asia division presidents who understand American business, and are high enough up on the food chain that they spend a lot of time in the States anyway. "You start knocking down the issues," he says. "Most of that stuff disappears for these people."