Domini Stuart examines the pros and cons of recruiting a foreign director to your board.
Australia is too small a market for many of our companies. As we strive to be globally competitive, should we also be striving for greater international diversity on our boards? It could be argued that a director born and bred in a target market could open doors to local networks and facilitate communication as well as provide an understanding of regulatory requirements, government issues and the way that business is done within that particular culture.
“In some parts of the developing world where the legal framework is not well established you might even want to try to influence government policy by having a heavyweight there, someone of status,” says Michael Robinson, a director at Guerdon Associates. “Getting the right person on board in these regions could have significant impact in terms of government regulation. Certainly, some of the companies we’ve talked to have seen it as a huge benefit.”
In his research, Robinson has found that pay and the tyranny of distance are the most-cited barriers to nominating international directors.
“While I can’t comment authoritatively on the distance issue, I can put to bed the pay myth,” he says. “At Guerdon Associates, we analysed US and Australian director pay and while there are differences in pay structure, there are no appreciable differences in pay levels in the largest and smallest companies.
“The story is different for the mid size companies – but the difference is still only about 25 per cent of pay for companies between $200 million and $600 million in revenues. Unlike CEO pay, where US compensation is typically three to five times that of Australian CEOs, the difference is not significant.
“The difference in non-executive director (NED) pay is resolvable in any number of ways. For example, boards could differentiate NED pay based on country of residence if they wish. Differentiating pay for just one director on a board of, say, five other NEDs would not make much of a dent in most board fees already approved by shareholders. There are few constraints.”
A long way to go
While pay may not be the concern some companies imagine, distance can, indeed, be tyrannical. John Hall sits on the Australian boards of two foreign-owned companies, the Bank of China Australia and PayPal Australia, and has found travel to be a very real issue, particularly for directors who are committed to making regular trips between Australia and the US or Europe.
“Global firms certainly benefit from having a mix of nationalities around the board table, but there are practical issues to be overcome, such as when and where you will meet and how those meetings will be run,” he says.
Hall believes that, ideally, directors would always meet in the same room.
“Conference calls and teleconferencing provide alternatives to some face-to-face meetings, but however good the technology is, it isn’t the same. You inevitably lose out on some aspects of body language and also the informal conversations that take place outside the boardroom. The directors I work with all know each other well which makes the occasional teleconference less of a problem. But we developed the relationships through face-to-face contact and still meet regularly in person throughout the year.”
Travel is expensive – along with physical costs like fares and hotel rooms, long haul trips take a physical, emotional and environmental toll. They are also immensely time consuming, which could restrict the number of directorships one person can manage.
The burden is exacerbated by the growing amount of hands-on work tackled by committees.
“Boards tend to be smaller than they used to and typically, each director will be on two committees,” says Graham Bradley, a director of SingTel. “You’re likely to spend as much time on committees as on ordinary board work, which means that international directors may not be able to be as effective or to pull their weight.”
SingTel is listed both in Singapore and Australia. Of the 11 directors, just four are Singaporean. The chairman is from Thailand and others are based in India, Hong Kong and Australia – a mix appropriate for a leading regional company with less than 20 per cent of its business in Singapore. However, Bradley questions whether appointing a foreign director is the most efficient way for an Australian company to explore strategic growth opportunities.
“Only a fraction of the director’s time can be devoted to that opportunity because of fiduciary responsibilities to the whole of the company’s operation,” he says. “It could be far more effective to engage relevant experts as consultants and advisers to work through the decision making associated with international strategy development or investment.
“In my view, it takes a director at least 12 to 24 months to learn enough about a company, its business, its position and the industry, and for the executive to be in a position to make a substantive contribution to strategy. It might be better to send executives to live overseas for a couple of years, to have them on the ground devoting their full attention to learning about the market. That’s the way companies like Westfield have expanded internationally. They placed executives in the US five or six years before their first acquisition there in order to get real hands-on knowledge of the market.
“Remember, too, that directors are typically retired. Unless they work very hard to maintain their sources of market intelligence, their currency with up-to-date market conditions does tend to erode after being out of an executive position for two or three years. They would be relatively less familiar with the detail of current industry structures, competition and other relevant issues than when they were executives.”
The limited pool
Australia’s population is tiny compared with Asia, the US and the UK. Does that mean our pool of directors is so small by international standards that companies have no choice but to bring in talent and experience from overseas?
“I really don’t think there’s an issue of supply,” says Hall. “There are many Australians with international experience capable of filling roles as they become available. The average executive director has travelled well, understands the way business is done and is as capable of bringing those skills to an Australian board as someone based overseas.”
There are also many Australian directors with a portfolio of overseas companies who travel extensively.
“The fact that they live in Australia doesn’t necessarily isolate them from all things international,” says Bradley. “A lot of Australian companies are very mindful of imposing a heavy travel burden and certainly, I would look first for returning Australian executives or recently retired international executives who are re-basing themselves in Australia – as we did with Stockland.’’
Stockland is a top 30 ASX-listed company which acquired its first European business earlier this year as a first step to significant growth in the UK and Europe. After putting a search in place, the board appointed Duncan Boyle.
“Duncan was CEO of Royal & SunAlliance for a number of years before retiring,” says Bradley. “He now lives in Australia, but maintains a residence in the UK and plans to be there twice a year for a month or so. He will be able to provide very valuable local presence in the UK and bring intelligence to board meetings, but travelling for him is much less of a burden.”
A cautionary tale
Fifteen years ago, Lend Lease was Australia’s leading property developer, seen by many – including itself – as a great pioneer. When it decided to grow rapidly internationally, it went out of its way to recruit a high-profile board with very few Australian directors.
The outcome was very disappointing for shareholders. Indeed, the strategy is generally regarded as a failed experiment that almost completely undid the company’s previous success.
Bradley believes this is an example of the type of lessons that should be noted by Australian companies. “There is serious potential risk if a board becomes too dispersed geographically,” he observes.
As directors of Global Board Consulting, Sue Jauncey and David Greatwich stress that geographical location should never be a company’s first consideration.
“That must always be the compositional mix,” says Jauncey. “We are a globalised world and in that sense, it wouldn’t really make a difference to us whether a director is overseas or local as long as he or she is the best director for the job. Our first priority will always be getting the right mix.”
The method of recruiting is also essentially the same.
“The only difference is that, when we’re looking outside of Australia, we do all of the research and reference checking by phone or teleconference,” says Jauncey. “We only bring someone out here when we’re 99 per cent certain this is the right person.”
If you do have an international director on the agenda, Jauncey says you need to be very clear about why you do, as well as your expectations from the relationship – that is, how it will work, what you want his or her input to be and how you will communicate effectively.
“You also need to consider how to be sure they will feel like a full member of the board,” says Jauncey. “If you have a single director overseas while the rest are based in Australia, they might feel isolated, or that it’s difficult to keep their finger on the pulse. Problems with distance in terms of both accessibility and time frames can have an impact on the board’s cohesiveness – how will you manage that?”
There might also be cultural issues to consider.
“When you bring together people from different cultures you need to be aware of sensitivities that may apply,” says Greatwich. “If you’re moving into a market that is significantly different, we suggest the board has someone come in to talk about possible cultural differences – what to look for, how to interact.”
Guerdon’s Robinson points out that directors from different countries may also have different styles and expectations.
“In Australia and the UK, directors tend to take a more active role in management oversight while in North America, the primary focus is on compliance and risk management,” he says.
Following a trend
As yet, there are no statistics on how many Australian boards have overseas directors, but the numbers aren’t likely to be high.
“I suspect they’re quite minimal,” says Jauncey. “However, I also suspect they will steadily increase as we become more and more global and a lot more companies work internationally.”
Nevertheless, Jauncey cautions against being seduced by the idea of an international director – something Greatwich sees as a throwback to the days of the cultural cringe. Jauncey also warns against submitting to the old ‘tap on the shoulder’ method of recruitment.
“Just being overseas isn’t enough. Any new director must have skills which complement the rest of the board,” she says. “Whether you’re looking in Australia or overseas, it will always be a lot easier to appoint a director than to have one removed.”
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