Many of these companies are headed by a board of independent directors where at least one member is based in a foreign country.
From working with many of these companies, I have found that these foreign-based members offer a a distinct worldview.
Their ability to transcend boundaries benefits the organization in a way that a purely domestic board cannot.
On the other hand, I have also found that they tend to be less involved due to geographic distance and time difference.
I mention this because I came across an interesting paper over at the Harvard Law School Forum on Corporate Governance and Financial Regulation.
In the paper, Globalizing the Boardroom – The Effects of Foreign Directors on Corporate Governance and Firm Performance, the authors examine independent directors of U.S. firms who are based in foreign countries and investigate how their geographic location affects their ability to perform their monitoring and advisory duties.
The study concluded that the foreign-based directors bring both benefits and costs to the corporations they serve.
On the positive side, foreign-based directors can utilize their international experience and knowledge “to enhance the advisory function of boards and benefit firms with substantial foreign operations or plans for overseas expansion.”
The study found that foreign-based directors ” make better cross-border acquisitions when they pursue targets from the home regions of FIDs.
But, as firms generate a higher percentage of total sales from their operation in the FID’s home region ,they derive more benefits from FID expertise.
Among other things, the study found that firms with a foreign-based director(s) “exhibit significantly poorer performance, especially when they do not have significant business presence in the [foreign-based director’s] home region.”
Notably, the authors found that the announcements of foreign-based director appointments elicit significantly negative stock market reactions, signaling shareholder skepticism about a foreign-based director’s contributions to firm value.”
Overall, the authors suggest adapting a balanced approach toward the hiring of foreign-based directors by U.S. corporations.
While not mentioned in the study, there’s also a dynamic at play here–the ability of key players within an organization to be “boundary spanners.”
The term describes individuals “that bridge the boundaries (such as geographic, class, political, ethnic, religious, racial, sexual) that divide their organizations, and turn those divisions into opportunities for profit.”
Professor Schotter sampled 150 name-brand global companies and found that organizational performance in the presence of boundary spanners is higher than for organizations without them.”
As Schotter explains these boundary spanners take knowledge from international markets and “transfers it across the network, eliminates dysfunctional conflict, creates inter-organizational trust and nurtures transnational management efficiencies.”
Because a foreign-based board member is more likely to possess these boundary-spanning attributes, a U.S. corporation should consider this as another key benefit offered by foreign-based board members.
The hiring of a foreign-based director, with their ability to transcend boundaries, creates additional opportunities for profit in a way a domestic board cannot.
What do you think?
The full paper is available below: