For organizations to endure, they must strike a balance between risks and rewards, short-term objectives and long-run goals, autonomy and control, and the interests of various stakeholders. To achieve these balances, companies need effective ways of challenging the decisions that top management teams make, particularly those that involve strategic choices. It’s impossible to do that with rules and regulations; corporations need well-functioning boards of directors.
Gone are the days when a group of like-minded, grey-haired men from similar backgrounds could provide adequate guidance and oversight. The need today is for diversity of experience and perspective. If everybody were to think the same way, there would be no need for a board; a single director would suffice.
Many companies in Europe, I find, take factors such as age, gender, and ethnic diversity into consideration when constituting their boards. They would also do well to consider appointing directors who have experience in different functions, scales of operation, and stages of business. Above all, though, companies should consider diversity of geographic experience if they wish to grow globally.
Although companies’ dependency on emerging markets is growing, their boards aren’t keeping pace with that trend. Even companies whose assets extend across a broad geographic range, I find, lack diversity in the nationalities of their board members.
Japanese companies usually have only Japanese directors. Toyota, for instance, has an all-Japanese board. Most European and American companies have people from both sides of the Atlantic on their boards, but few directors from emerging markets. For instance, Royal Dutch Shell has five British, three Dutch, and two Swiss directors, and one each from Finland and America; TOTAL has 12 French directors and one apiece from Sweden, Canada, and Britain; GDF Suez has 18 French directors and one each from Belgium, Canada, and Britain; and BP has nine British and four American directors, and one Swede.
Other global companies have similar boards. For instance, GE has 13 Americans, two Canadians, and one Briton on its board, while Vodafone has five British, two French, and one director apiece from Italy, New Zealand, Belgium, and South Africa.
Arcelor Mittal, by contrast, has a fairly diverse board with four directors from Luxembourg and France, three Indian and two American and Spanish directors, as well as one Belgian and one Brazilian. Is it an accident that the steel giant is expanding furiously in developing countries? I don’t think so; companies targeting significant growth in emerging markets benefit from having board members from those countries.
Let me give you another example from my home base: Many Turkish companies are trying to get themselves included on the Istanbul Stock Exchange’s Corporate Governance Index (XKURY), which has become a symbol of the desire to build a better board. I find that the ones who have chosen to get a corporate governance rating have a bigger international footprint — as measured by the ratio of sales generated from and assets held outside Turkey — than those that haven’t done so.
Interestingly, these companies also have many more board members from outside Turkey. For example, of the companies with the top governance ratings between 8.5 and 10 — such as Anadolu Efes, Arcelik, Dogan Yayin Holding, Petkim, Park Elektrik, Sekerbank, TAV, Turk Traktor, TSKB, Tupras, Vestel, and Yapı Kredi — all but three have appointed some directors from abroad.
By contrast, Turkish companies that don’t have international board members — such as Sabanci Holding, Dogus Holding, and Eczacibasi Holding — don’t have much of a global presence. There seems to be a distinct correlation between Turkish companies’ global ambitions and international diversity on their boards. Would you agree that’s true of most emerging markets?
Harvard Business Review Blog