Company executives looking for a foreign director must pay attention to the implicit bias that leads to the hiring of a culturally similar director, who may share characteristics including language, religion or heritage, new research from Florida International University’s College of Business (FIU Business) shows.
These similarities, researchers found, could induce social conformity and groupthink that may result in inefficient decision-making and have a negative impact on board performance.
“We are experiencing the globalization of boardrooms driven by similarity versus diversity,” said Pietro Bianchi, assistant professor in the FIU Business School of Accounting, who conducted the research.
The paper, published in the September issue of the Journal of Accounting Research, analyzed how similarities, including language, religion and financial as well as governance factors impact foreign director appointments.
“Contrary to common wisdom, foreign directors are much more similar to the home country of the company to which they’re appointed.”
Researchers examined the BoardEx database for information on board membership and directors and senior executive officers of public companies in 38 countries – 169,472 directors appointed to 26,940 corporate boards from 2000 to 2013. They also reviewed reports from World Bank, United Nations Comtrade Database and World Economic Forum, among others.
The study’s findings can provide valuable insight for companies looking to add directors from different backgrounds.
A U.S. company seeking to open new markets in Latin America, for example, would benefit from appointing directors with experience in the countries being targeted, Bianchi explained. The firm may find talent in Miami from those regions who? may open doors that are key for new markets or acquisitions.
“Executives should look for talented individuals from Latin America,” Bianchi said. “These individuals might bring unique and diverse expertise that can result beneficial to the board, for example by introducing the board to the rules of corporate governance of their own country.”
The phenomenon of similarities shared by foreign directors and a company’s home country, constant throughout the 15 years Bianchi and the co-authors looked at in the study, is likely to continue for a long time.
“To change, there is a need of change at the higher levels, maybe pushing companies to bring a different expertise of board; looking for directors with different characteristics,” said Bianchi.
Bianchi conducted the research with John Barrios of Washington University, Helena Isidro of Instituto Universitario de Lisboa, and Dhananjay Nanda of the University of Miami.