More Australian companies are appointing offshore directors as businesses become more international. Alexandra Cain explains why overseas directors deliver greater board diversity.
As the executive chairman of South America’s LatAm Autos, Tim Handley MAICD knows a thing or two about the merits of having offshore directors. The business is the South American equivalent to local online car classifieds business carsales.com.au.
While Handley and the company’s chief executive officer (CEO) Jorge Ribadeneira MAICD reside in South America, two directors, Mike Fitzpatrick MAICD and Colin Galbraith AM FAICD, are based in Melbourne and another director, Simon Clausen MAICD, is based in Zurich. The company is listed in Australia because the market has a history of successful online classifieds businesses, including Seek and realestate.com.au and investors are familiar with the potential of the business model.
LatAm is among the growing number of local companies that are appointing directors based overseas to their boards. The trend reflects the entrenchment of Australian businesses in offshore markets and the globalised nature of business.
Having directors located around the world certainly has its advantages. But it also comes with challenges that must be managed. Handley says the main issue the LatAm Autos’ board faces is managing time zone differences. “There’s always someone on a phone conference who is either up incredibly late or incredibly early,” he says.
According to Handley, the best way to manage board meetings when members are working across the world is to ensure all the directors receive all the information they need well before the meeting. “You don’t want to have people on calls for hours on end if they are up really early or really late,” he says.
Aside from monthly board meetings, which are by necessity conducted by teleconference, LatAm Autos’ directors occasionally meet up face-to-face. For instance, they recently met in London, and at the same time conducted an investor road show.
Meeting logistics aside, Handley says there are plenty of advantages to having offshore directors. “The online classified sector is globally very active and lots of international investors are interested in it. Having people based in different markets helps to develop our worldview. When you operate in offshore jurisdictions, having a fully Australian board is a risk because you need people on the ground where you’re operating,” he says.
Harvey Christophers, managing partner of risk services, Deloitte Australia, agrees appointing overseas directors is a way to mitigate business and strategic risk. “It’s a big driver for having a diverse board. If a company is becoming more global, you need directors with a range of experiences to bring perspective to the risks that will impact your strategy. If a company is thinking about investing more in Asia, Africa, Europe or the US, you need directors with experience there – political, consumer, regulatory and tax risk being key areas of risk to consider.”
Increasingly, companies are looking for directors who have experience in Asian countries. Christophers says there is an emerging pool of people with commercial experience in China and South-East Asia. For instance, executives who have been running businesses there who are now looking for non-executive directorships at a later part of their career.
With Deloitte Access Economics estimating that around 20 per cent of students currently enrolled in higher education have come from Asia-Pacific, relationships are being built now that will provide a source of contacts for businesses who need directors with Asian experience down the track.
Christophers says the role of the chairman comes to the fore when there are directors from overseas. “You need someone who understands cultural differences and how directors from different backgrounds should be introduced to the conversation, where in the same instance an Australian director may just jump straight in.”
Accounting software business Xero has strategically managed its board composition as it has grown, appointing board members depending on where it has been in its growth cycle. CEO Rod Drury says it is presently focused on international expansion, so board directors with global experience are crucial – three of its directors are internationally based. Chair Chris Liddell formerly held senior positions at Microsoft and General Motors in the US. Xero non-executive director Bill Veghte is the executive vice-president and general manager of Hewlett-Packard’s US$27 billion enterprise group. Non-executive director Graham Smith is the executive vice president of finance at cloud computing company Salesforce. All three are based in the US.
Drury says most board meetings are held in San Francisco, which is Xero’s main hub in North America. Directors catch up in person four times a year and attend video conferences for other meetings. “We always have a board dinner the night before the board meeting which allows us to address contentious issues and so the meeting flows. We make compliance only a small focus at the meeting so directors can contribute to strategy as much as possible,” he says.
Ernst & Young human capital partner Mike Hogan says it is usually businesses like Xero that have aspirations of building a global business that appoint international directors. “But then you have businesses with an Australasian focus that want offshore directors because they’re looking for specific skill sets, or they want a director that knows a particular industry or they have a technology need,” he says.
Hogan says one of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations that requires companies to structure their board to add value to the business is another reason why companies appoint overseas directors. He suggests that another reason why overseas directors are appointed is to help companies make better decisions.
“It allows a business to cast its net wider because there’s a bigger pool of people to consider. Good companies with good boards look at overseas directors as an opportunity and don’t view geographies or time zones as a deterrent,” he says.
With more and more businesses looking offshore to grow revenue streams and to identify new markets, it’s highly likely that in the future, boards with offshore talent will be the rule rather than the exception.
The pros and cons of overseas directors
There are both advantages and disadvantages to having directors based offshore. As long as the potential drawbacks are managed, overseas directors can add considerable value to a business.
• Diversity of thinking at board level.
• Better understanding of local regulations.
• Ability to better structure operations for tax efficiencies.
• Managing time-zones.
• Needing to have board papers prepared well in advance.
• Managing cross-cultural differences between board members.
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