When Goldman Sachs wanted to make an addition to its board this past summer, it could have picked nearly anyone it wanted. Goldman is considered one of the most prestigious board appointments a corporate director can land. It could have selected a political heavyweight or any well-known American Fortune 500 CEO, most of whom have been declining more board invitations than they have been accepting. Instead, the investment banking giant, which recently recast itself as a bank holding company, set its sights abroad.
Goldman announced that it was going with Lakshmi Mittal, the chairman and CEO of ArcelorMittal S.A., the world’s largest and most global steel producer. “He has a keen understanding of the global economy, having operated in virtually every corner of the world,” said Lloyd C. Blankfein, chairman and CEO of Goldman. As the bank continues to expand worldwide, that keen understanding will be invaluable as the board charts the company’s course.
Goldman’s board selection is just one of the most recent examples of a trend that is reshaping both the composition and the culture of American boards. There is a movement underway to diversify boards that adds a strategic context to the traditional diversification goals of gender and race. Boards are looking to add members with global business experience or, better yet, directors who were raised, educated, and trained outside of the United States.
This trend reflects the idea that the board should be more in touch with the markets where they conduct business and with the customers that live there. Large U.S. companies now generate a greater portion of their revenues from outside the United States than ever before. For example, Jeffrey Immelt, CEO of General Electric, says that the company will derive 60 percent of sales outside the U.S. by 2012, up from about 55 percent expected this year. Moreover, the company’s overseas business is growing at twice the pace of its U.S. operations.
GE’s global ambitions are reflected in the directors it has named to its board. In addition to those directors born or raised outside the United States—such as Claudio X. Gonzalez, who was born in Mexico, Sir William Castell of the United Kingdom, and Andrea Jung who, while born in Canada, is fluent in Mandarin—the company has sought individuals whose business experience and knowledge identifies them as the new class of “globalists.” The board also counts as members A.G. Lafley, CEO of Procter & Gamble, and Sam Nunn, a former Congressman who is considered such an expert on international affairs that Georgia Tech, where he is now a professor, named its School of International Affairs after him. “Companies like General Electric, PepsiCo., Procter & Gamble, Citigroup, State Street, and others understand that they need a board that reflects their business practices,” says George Davis, U.S. co-managing partner at Egon Zehnder International, a global executive search firm. “The more enlightened companies with global businesses are approaching their boards differently, and are looking to put more global expertise and knowledge of international markets on the board.” And it’s not just large companies that are building global boards; medium sized companies are also looking for global diversity, he adds.
Rita Foley, a director at Dresser Rand and PetSmart, says the globalization of the boardroom is imperative. “More and more revenue is coming from outside the U.S. Our role is to poke and steer strategy and that means a key role for globalization. If we are going to be effective global competitors, than it is going to take a global board.”
According to Davis, the S&P 500 now derives 42 percent of its revenues outside the United States, but only six percent of the directors of those companies are from foreign countries. “There is a mismatch here,” he says. More surprising is that some of the largest companies haven’t diversified at all. In fact, nine of the 30 Dow Jones Industrials have all U.S.-born directors. “We have to be sure that we are not myopic with our lens,” says Davis.
Strategic business decisions should determine when and how any board approaches efforts to globalize. “As soon as you have a clear strategic intent to operate beyond your domestic borders, that’s the time to add directors to your board from those geographies where you’re going,” says Richard Hossack, head of the governance practice for Delta Organization & Leadership, a part of Oliver Wyman. “This isn’t really that different than if you were a start-up board: you need to be thinking about [candidates] who can build strategic alliances and who understand financing, manufacturing, government relations…and it’s not enough to parachute in a couple of new directors,” he says. “You have to play a role as a global director, so you need to act like a global director. Hold board meetings in these new territories and make sure you meet local government officials and key customers, tour the facilities, and meet employees.”
Building One BRIC at a Time
Yet adding board members from foreign countries is no easy task. First, there is the practical aspect of having someone from the other side of the globe attend board meetings and correspond from thousands of miles away and over several time zones. Then there are difficulties finding qualified individuals in locales where the board doesn’t have as much knowledge, not to mention the cultural and language barriers that exist. (See “From Brazil to Dubai.”)
The most desirable global directors are from the so-called BRIC emerging markets: Brazil, Russia, India, and China. Some of these countries have a greater supply of potential directors than others. Justus O’Brien, co-managing partner of North American Board Services at Egon Zehnder, says that it can be more difficult to find qualified directors in China, while in India there is a much larger supply of qualified candidates.
“It’s not as mysterious as it may sound to build a global board. It’s not that different than building any great board.” –Justus O’Brien, Egon Zehnder
“It’s not as mysterious as it may sound to build a global board. It’s not that different than building any great board,” O’Brien told directors attending Directorship’s Global Boards Forum in New York in September. “What is needed is simply a clear-eyed assessment of the current and future needs of the business.” Underlying that assessment should be a plan for board transitions, such as the addition of newly promoted inside directors, or the scheduled retirements of current directors. A more diverse board also offers some assurance that “cultural group think” is broken, O’Brien says. Many corporations, including Alcoa, have adopted the Business Roundtable’s “Principles of Corporate Governance,” which includes a plan for the departure and replacement of directors that stipulates a mandatory retirement age and term limits.
The due diligence that must be performed on potential board members from around the world can also be more challenging, since boards typically know less about the individuals or don’t know people who can vouch for them. “The due diligence process needs to include a deep legal and background check,” says O’Brien.
How do you define global experience? In the past, boards might have sought out international experience by putting together an advisory board. If a company was considering moving into two or three large markets, it might have created an advisory board with individuals who had knowledge of these markets, but were not necessarily board-caliber business leaders. That has changed. “Globalism in the board room is at a strategic level. It’s not about marketing,” says Davis.
It’s true that boards are seeking foreign nationals, but that is not the only aspect of building a global board. Companies are adding Americans that have run large divisions in Europe, Asia, or South America. They are also adding individuals who are internationalists. That means they have a keen understanding of the global economy, not just one region of it.
“The reality is that all significant businesses are operating in the global economy,” says William George, a professor at Harvard Business School and a director at Goldman Sachs, ExxonMobil, and Novartis. “It’s extremely important to have people on the board who have a deep understanding of different global cultures and how they do business there.”
One example of the perspective that global members can provide is that the U.S. accounting system is currently in the process of shifting to an international standard. Mary Pat McCarthy, U.S. vice chair at KPMG and director of KPMG’s Audit Committee Institute, says that global members who have been working with the International Financial Reporting System (IFRS) can provide some insight on its positives and negatives. “Creating a global board is an enabler to competing in the worldwide economy,” she says.
The Board Field Trip
Not surprisingly, large foreign companies with businesses in the United States are looking to put Americans on their boards. Harvard’s George was the first person from a non-German speaking country to gain a board seat at Novartis, headquartered in Switzerland. When he joined the board and it listed on the New York Stock Exchange, it also changed its official business language from German to English. “They were making a statement that they wanted to be a global company, and the U.S. is a very important market,” says George. Novartis has since added fellow American Anne Fudge and Marjorie M. Yang of the United Kingdom to its board.
The language shift to English at Novartis shows just how much of an impact going global can have on a board. Not only did the language change, but there were other subtle shifts in cultural aspects of the board as well. For example, George says that when speaking German, the board used a more formal tone. They addressed each other in the German equivalent of mister, professor, or doctor and used last names. With the change to English, they began addressing each other by their first names.
“Creating a global board is an enabler to competing in the worldwide economy.”
–Mary Pat McCarthy, KPMG’s Audit Committee Institute
George admits that logistically it can be tricky to add foreign nationals to the board. Directors have to increase travel time and language remains a real barrier, but he says it is worth overcoming the logistic hurdles to bring board diversity. “That’s part of the commitment,” he says. “We are not talking about part-time board members. And they are not just calling in to the meetings. Board members are really taking the time to attend meetings.” He says that the job of director has expanded enough that board members take their roles and their time commitment very seriously. He also thinks board members should be paid commensurately for this more demanding regimen required of global boards. One technology solution that may also help global boards to communicate through different time zones are board portals, such as Diligent Boardbooks and Nasdaq’s Directors Desk, that facilitate virtual meetings in a secure environment.
Egon Zehnder’s Davis says that boards shouldn’t put too much emphasis on the logistical barriers to creating a global board. “Tactical thinking gets in the way of a global board. They get too worried about the travel, language, and cultural differences. You have to find creative ways around them.”
Occasionally, board meetings are held overseas in the home countries of one of the global members. George says there is also a trend of boards setting up trips as long as a week to visit far-flung operations or to get a better sense of what is happening in a particular country. For example, the Goldman board traveled to the Middle East and visited Saudi Arabia, Dubai, and Israel, where they met with dignitaries and politicians. The board of ExxonMobil traveled to France and Japan in recent years. And Novartis is planning a trip to Singapore. “Don’t think they are boondoggles,” says George. “These companies are very serious about globalization and the time is very well spent. Everyone is there.” He says American companies realize that they have to have a broader perspective on how these countries work. “You can’t view everything through an American lens.”
One of the reasons that the Japanese fell behind in the 1990s is that they didn’t have enough diversity in their management ranks or on the board, according to George. He thinks U.S. companies could face the same fate if they don’t learn from those mistakes. “American global companies are coming around to this way too slowly.”
Egon Zehnder’s O’Brien agrees: “Boards will find that they are lacking real global perspective. They need to diversify their cultural perspective to break the cultural group think.”