Globalizing the Boardroom

Companies World-Wide Add Foreign Directors, but Boards In U.S. Are Slow to Follow

By Joann S. Lublin
Staff Reporter
The Wall Street Journal
October 31, 2005

When Paul Anderson took the helm of Duke Energy Corp. in late 2003, the Charlotte, N.C., company had only one foreigner, a Canadian, on its 11-member board of directors. Mr. Anderson soon persuaded Roger Agnelli of Brazil, who runs a big mining concern in that country, to accept a seat. Duke has invested $2 billion in Latin America since 1999.

"It strikes me as foreign to not have foreigners on a major U.S. corporation's board," explains Mr. Anderson, who previously led BHP Billiton Ltd., an Anglo-Australian resources conglomerate. He diversified Billiton's all-Australian board to encompass five nationalities offering "a world view," he recalls. Mr. Anderson is now the sole American citizen on the board of Australia's Qantas Airways.

Around the world, corporate boards are going global. Driven by a surge in cross-border takeovers, the clamor by shareholders world-wide for improved corporate governance and a rising pool of senior executives with overseas experience, multinational businesses increasingly are tapping directors from outside their home countries.

Advocates say the broadened geographic reach brings new perspectives to the boardroom. Yet many U.S. companies haven't gotten the message. A 2005 survey by recruiters Spencer Stuart found that only 35% of 149 large U.S. businesses have at least one non-American director, a modest rise from 31% in 1999.

By contrast, about 90% of Europe's largest concerns by market capitalization boast one or more directors from outside their home country. At about 49% of those 99 companies, there is at least one American on the board, up from about 35% in 1999, according to an analysis for The Wall Street Journal by search firm Heidrick & Struggles International Inc.

That may put U.S. companies "at a disadvantage in the global marketplace," says Gavin Anderson, president and chief executive officer of GovernanceMetrics International, a governance ratings and research service in New York. Any major American company with significant sales abroad needs "at least one individual on the board who represents the views of the rest of the world," Mr. Anderson says.

The lack of foreign directors also means management "may make bad decisions" about international expansion, suggests Stephen Mader, head of the board and CEO practice for recruiters Christian & Timbers in New York. He cites Walt Disney Co., which had an all-American board until this year, as "a dramatic case of failure." EuroDisney SCA, 40%-owned by Disney, has struggled to make money since the first of its two French theme parks opened in 1992. Disney officials "totally misestimated the kind of reception they would get for an American entertainment institution in France. It took them years to re-engineer that." A Disney spokesman declined to comment beyond saying he couldn't confirm whether the board previously had a non-U.S. citizen.

The long list of U.S. companies with all-American boards includes many that reap substantial revenue abroad, such as Hewlett-Packard Co. The Palo Alto, Calif., high-tech giant derives nearly two-thirds of its $80 billion in annual sales from outside the U.S.

H-P's board recently hired a search firm to find a non-U.S. director "who has lived and spent the bulk of [his or her] career overseas," says Robert Sherbin, a company spokesman. He adds that H-P does have "international knowledge" on its board, from executives who have managed U.S. businesses with overseas operations.

Some recruiters say overseas work experience can be equal or more important than the country on an executive's passport. "I would rather have a director who ran a business in France who may be American than someone who just happened to be born in Paris and has a French surname," says Dennis Carey, a Philadelphia partner at Spencer Stuart.

But global-minded governance advocates disagree. Anne Simpson, executive director of the International Corporate Governance Network, believes it is misleading to label a director "international" for working a stint overseas or for a company to regard its board as international if it is 99% American. The London-based network represents investors responsible for more than $10 trillion of assets world-wide.

The sole foreign citizen on Wal-Mart Stores Inc.'s board is Australian Douglas N. Daft, a former Coca-Cola Co. CEO who resides in New York. The world's largest retailer by revenue, which derives 20% of its sales from outside the U.S., is "actively searching" for another non-U.S. director, says spokeswoman Mona Williams.

"U.S. companies in general have much more homogenous boards" because their huge home market stands "in the way of internationalizing," says Daniel Vasella, chief executive of Novartis AG, a big Swiss pharmaceutical maker. Novartis has five nationalities represented on its 12-member board, where the seven foreigners outnumber the Swiss. The diverse views "enrich" the board debates, observes Dr. Vasella, who is Swiss. "Group think is not a good thing."

Dr. Vasella believes so strongly in the idea that he sought, and won, an exemption from a Swiss regulation that a majority of directors be Swiss citizens. And he is already looking for some other foreign nationals to become directors in 2008, when five incumbents leave. "I need people who have a world-wide outlook" because Novartis operates globally, Dr. Vasella told the Swiss government.

Many European concerns adopt the strategy by necessity, because their home markets are relatively small. Novartis, for example, derives only about 1% of its revenue from Switzerland; Europe as a whole accounts for 36% of its revenue.

Others recruit Americans as they expand geographically. Two years ago, former investment banker Maria Richter joined another American on the board of British utility National Grid PLC. Thanks to three U.S. takeovers in five years, National derives about one-third of its revenue from the U.S. The American directors' knowledge about the U.S. market and regulatory trends is "very valuable to us," says Sir John Parker, National's nonexecutive chairman.

American directors say that when they try to globalize their boards, they often face resistance from foreign candidates worried about scheduling conflicts, time-consuming travel and legal risks. International directors must also quickly grasp different accounting rules and securities laws. "It's really hard," says H-P's Mr. Sherbin, noting that other big U.S. companies are competing for the same "small pool" of foreign candidates.

These days, many U.S. companies are seeking board expertise on China, as they try to tap that huge market. But not all insist on giving seats to Chinese nationals who live in China. Some are willing to settle for Chinese expatriates in the U.S. or executives of any nationality who have worked in China. Yet they still often come up empty-handed.

Last summer, a Chinese man in charge of a $3 billion Chinese operation for a multinational agreed to be the first non-U.S. board member at a large Midwestern manufacturer with a booming Asian business, according to a person familiar with the situation. The Beijing-based candidate promised to attend the company's eight board sessions a year. Nevertheless, officials feared he might miss several sessions and postponed the offer until after his 2006 retirement, the person says.

European companies looking for foreign directors encounter the same obstacles but sometimes employ innovative strategies to surmount them. At Novartis, Dr. Vasella eases the stress of repeated foreign travel by letting directors hitch rides on a corporate jet. The Novartis board convenes 11 times per year, most often at its Basel headquarters.

Some non-American companies also have boosted the fees they pay directors to lure foreign candidates. In 2002, former Securities and Exchange Commission Chairman Richard Breeden became the first non-Spanish director of Banco Bilbao Vizcaya Argentaria SA, Spain's second-largest bank by assets. His director fees totaled about $362,000 last year -- nearly five times the average for outside directors in Europe.

Mr. Breeden's appointment was part of the bank's efforts to bring governance in line with international standards following a hidden-accounts scandal. Since he arrived, BBVA has begun to disclose top-management pay and bought two U.S. banks.

Still, Mr. Breeden says he typically misses one or two of the 12 board meetings each year. He sits on no board committees. Chief Executive Francisco Gonzalez doesn't mind, calling Mr. Breeden "a very involved director." When there is another vacancy on BBVA's board, Mr. Gonzalez adds, "I would like to have another foreign director."