Study should serve as a warning that a shortage of directors with ample international experience could inhibit future global growth
There’s a mismatch of mega proportions in corporate boardrooms. The disparity between the largest companies’ global footprints and the global experience of their board members is uncomfortably wide, according to a new report from executive search firm Egon Zehnder.
On the boards of America’s 100 most global publicly traded companies -- those that earn more than half of their revenue outside the US -- only one in 10 directors is a foreign national, and just two in 10 directors report having significant international work experience, according to Egon Zehnder’s newly released Global Board Index 2014.
‘The makeup of corporate boards of leading publicly traded U.S. companies does not match the international aspirations of those companies to grow globally,’ says George Davis, Jr, co-leader of the Egon Zehnder’s global board practice.
The Global Capability Gap, as the firm calls it, is critical as companies increasingly look beyond US borders for revenue growth. Nearly three-quarters of all S&P 500 companies now report some international revenue, which is up to 37 percent of total revenue on average, an increase of 5.5 percentage points since 2008, says Davis.
The percentage of directors with international work experience has not kept pace over the same period, however. Since 2008 it has risen only six percentage points (from 8 to 14 percent). The proportion of directors who are foreign nationals has increased less than one percentage point (from 6.6 to 7.2 percent) over the last six years.
The gap is widest in the technology industry, according to the Index. The average share of international revenue in the IT sector is 55 percent, the highest in the study. But on the for boards of IT companies, foreign nationals account for only 8 percent while those with significant international work experience constitute just 13 percent of the members.
‘IT companies have a greater share of [business to business] focus and historically have more concerns about intellectual property, which may be why they are not as focused on international experience,’ explains Davis.
On the other hand, consumer staples companies show better alignment with their global business presence. These companies earn 36 percent of their revenue on average from foreign sources and foreign nationals represent 11 percent of their boards while directors with significant international work experience represent 22 percent. That’s not surprising given that consumer staples firms are the most direct-to-consumer of the industries Egon Zehnder surveyed and were the first to earn a major portion of their revenue from foreign markets. ‘Historically, they are the fastest to adapt to new trends, including globalization,’ says Davis.
Narrowing the gap is critical as boards need ample foreign business experience to provide the best oversight to their companies’ global strategies. ‘If they are not capable of understanding opportunities and challenges in global markets, they can’t provide governance aligned with the company’s strategy,’ Davis says. The survey’s results should be a warning to many corporations that a shortage of directors with sufficient international experience could inhibit growth in global markets, he adds.
‘International business is no longer an export game,’ and to compete companies must make sure their boards have the right global focus, says Davis. He’s surprised by how little progress boards have made in bringing on foreign nationals or directors with meaningful international work experience in recent years. It suggests boards don’t see this as a priority when recruiting new members.
‘It may take a bad experience or a significant misstep in a foreign market before a board proactively adds global expertise to the specs for new directors,’ he says.
If the shortage of relevant experience can be attributed to a shrinking pool for top board talent, global companies’ boards don’t seem willing to consider recruits with the required experience but with less C-suite experience under their belts.
‘This would be a difficult trade-off. Directors must have had significant exposure to the board in an executive role in order to be effective,’ Davis says.
The most successful companies will be ones that act quickly and aggressively to insist on global business experience as a criterion for some directors. ‘Boards need to evaluate their own makeup and then take steps to provide more international experience,’ says Davis.
Boards should also take a long-term approach to director succession by considering how well the company’s immediate and future strategies position it for international growth. That will determine how much relevant expertise they will need in their ranks to provide oversight and protect shareholders’ interests, he says.
