Over the past century, the corporate world has grown ever smaller as globalisation has come to the fore. The rise of multinational companies and international employee mobility has led to an unprecedented sharing of business experience as the world has become our commercial oyster.
Nevertheless, there are still big differences in the culture and context of corporate governance between different global territories. For the world’s increasingly well-travelled Board members, understanding these differences and adapting accordingly is vital to success.
The rise of globe-trotting Board members
International presence in the Boardroom is becoming increasingly common. As boards seek to gain global perspectives, the number of international director appointments on both sides of the Atlantic is on the rise. Executive Consultancy Spencer Stuart’s latest Board index found that 13% of new US Board members were born outside the US and 32% of US board directors overall have global professional experience. In the UK, 33.6% of all directors in FTSE 150 organisations are designated “foreign” – i.e., they are of a different nationality than the company that they serve, with 39% hailing from North America – while in the wider European region, 31.5% of directors are of international origin.
This growing number of international board members, some serving simultaneously in different territories, need to be conscious of the different features of US and European corporate governance and the associated benefits and disadvantages.
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Same board member aims – different approaches
Whether in the US or Europe, Boards have the same primary aims. They are charged with: 1) oversight, monitoring and control of the management of the company and all critical functions; and 2) setting the strategic direction of the organisation. However, the route to achieving these aims differs due to a number of factors.
The way corporate governance evolves is profoundly shaped by the environment in which it exists. The economic, financial, legal, cultural and historical backgrounds of different regions have a distinct effect on business priorities and underlying ideologies.
The US, with its energetically capitalist outlook, places shareholder interest above those of all other stakeholders. Indeed, in some of the 50 states, this approach is enshrined in law. The philosophy operates on the theory that if shareholder interest is protected, the interests of other stakeholders will be protected by default.
European corporate governance, on the other hand, with a broadly socialist genesis, identifies the company’s interest as a separate, more diverse entity from that purely of shareholders. Directors are charged with balancing and protecting all stakeholder interests holistically. All stakeholders, from employees and investors to the wider community, must be considered. In some European country structures, for example, employees are guaranteed representation on the governing body, whereas this is not a feature of US Boards.
While there is no employee representation on UK Boards, there is movement towards greater engagement with wider stakeholders, as underlined in the recently published updates to the UK corporate governance code. This places stronger emphasis on the Board’s engagement with the workforce and wider corporate stakeholders, alongside their duty to shareholders.
Corporate governance structures and board member representation
The varying approaches have affected the governance structures seen in the different territories.
In Europe, separation of supervisory/monitoring and executive roles is often achieved via a two-tier board structure. In Germany, Austria and the Netherlands, the two-tier structure is mandatory for large companies; in other countries, it is the norm for larger organisations to adopt this approach.
In the UK, Ireland, Spain, Italy and Portugal, the unitary Board is the only system used. However, separation of oversight and executive functions is often achieved via the committee structure and the appointment of independent Chairs.
In the US, Boards operate according to the unitary system. However, there are differences between European and US unitary Boards. The most significant of these is the role of the Board Chair.
Learn more about the differences between US and European Boards from international board member Sara Mathew, talking to Boardroom Resources’ TK Kerstetter.
Board Chairs and CEOs – combined or separate roles?
The combination of the roles of Board Chair and CEO is a particular feature of US Boards compared with their European counterparts. Spencer Stuart’s 2018 US board index found that 50% of the S&P 500 companies have a combined Board Chair/CEO. This contrasts with just 11 (0.7%) of FTSE 150 organisations.
There are arguments in favour of both approaches. Those who favour separation of Board Chair and CEO contend that this offers greater independent challenge and allows for a degree of continuity should either post-holder leave the organisation. It also ensures that the Board is led from an independent perspective while allowing the CEO to focus fully on operational issues. This can be of particular value in times of crisis, with the Board Chair leading on external relations and media, while the CEO leads the organisation’s response.
Commentators who support the combination of roles point to the benefits of stronger connection between management and the Board if the Board Chair/CEO wears both hats simultaneously.
While both viewpoints have merit, the trend is towards greater separation of Board Chair and CEO. The number of S&P 500 organisations combining the two roles has dropped by 18% in the past 10 years and more than 30% now have fully independent Board Chairs. Furthermore, there is a move in organisations that retain the combined Board Chair/CEO role to appoint Lead Independent Directors (LIDs). These directors are responsible for setting the Board agenda and running executive sessions in the CEO’s absence, in order to improve governance and accountability.
Time’s up – the tricky topic of director term limits
The length of time that directors are permitted to serve continuously on boards is also a key area of divergence between the US and Europe. In the UK, the maximum permitted term of service is nine years, beyond which organisations must explain how the director’s independence has not been compromised by the extent of their engagement with the business. The same applies in France after a period of 12 years.
In the US, however, there is a marked reluctance to set binding term limits. Only 5% of S&P 500 boards have explicit term limits and 65% explicitly state that they have no such limits. Some organisations are making moves towards putting term limits in place, a notable example being Microsoft, which is aiming for tenures of 10 years or less, but generally, length of tenure is not seen as an issue.
Again, there are arguments on both sides. Experience at the Board level is undeniably an asset in favour of extended director tenures. It can also be argued that longstanding Board members are more confident in their position and more willing to challenge the CEO. On the other hand, fresh perspectives are essential for informed and effective decision-making, and regularly welcoming new directors helps boards improve diversity and gain the associated performance benefits.
Beyond the structural differences and accepted norms in the different territories, there are undoubtedly cultural differences to which international directors will need to adapt. Sara Mathew, an experienced director who sits on Boards in the US and the UK, notes that “UK directors tend to be more direct, when you talk to them. Whereas in the US, directors are maybe a little more polite!”
There’s no doubt that continuing globalisation will lead to more Board members taking international appointments. Experiencing the differences in corporate governance between territories is a great opportunity for organisations to learn from each other and, as a result, to grow stronger.
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