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Corporate Governance: Spotting the Difference in Boards Across Borders

April 11, 2011
​​Globalisation has increased the need for managers and investors to develop a strong understanding of how boards in different countries operate, but to date there's been little insight into the modus
operandi of boards in different cultures. In a global economy, surprises lurk at every turn and speaking the same language offers no ready reckoner. "Everyone who wants to invest in a US company or to hire a CEO from the US to run an organisation in another country must understand how US businesses are run," emphasises Rosemary Howard, executive director of AGSM Executive Programs.​
For instance, a classic cultural misunderstanding is construed from the epic battles between Australia's predominant telco Telstra and the federal government during US executive Sol Trujillo's four years as chief executive and director from 2005. As Trujillo made a largely unlamented departure from Australia in February 2009, elecommunications analyst Paul Budde described the clash to Australian TV network, ABC: "Trujillo came over very, very arrogant. He did not want to listen to other people, doesn't want to co-operate with other people. Not with the regulator, not with the government, not with the industry, with nobody. That might work in America, but it's very un-Australian."

However, Trujillo is not alone in exemplifying cultural dissonance. "You may think you understand how
South Africans work and feel you can become a board member in Cape Town – but if you do, you might
be in for a steep learning curve," suggests Andrew Kakabadse, a professor in International Management
Development at the UK's Cranfield University.

While contrasts abound, there are unexpected similarities between boards in different cultures as well,
Kakabadse points out. Despite their communist background, boards in China and Hong Kong resemble
those in Germany, he says. "In both regions, it's about networks and their power. And these networks
influence what is happening."

Kakabadse and a team of researchers interviewed non-executive directors, CEOs, chairs and executive
directors in the US, UK, Australia, Turkey, Ireland, Germany, Russia, Belgium, China, France and
Scotland. After collecting data from more than 1500 boards, the research focused on measuring board
performance, particularly with respect to the chair, the chief executive and the board itself.

Boards operate on three different levels, Kakabadse reports. The first is about the basic philosophy on
which a corporation is run. It is either the classic short-term US shareholder value-driven system or the
German or Japanese model with strong emphases on relationship, long-term growth and delivering to all

The second level defines questions of protocol, such as the Central European and German-bred
"Rheinische" model with a two-tier system, where the non-executive board is a separate supervisory body.

Another model operates in the US where the role of chairman, president and chief executive often belong
to one person. This level of corporate governance also comprises the practices applied in a specific
corporation and compliance to national legislations.

The third level is the local or cultural one. It comes down to regional customs and attitudes. This defines
whether a board works as a team – as boards do in Australia – or as a rather formal encounter of
individuals as is customary in the UK.

"Efficient board members operate on all three levels," says Kakabadse. "Most board directors and even
chairmen concentrate on level two (protocol), do not think sufficiently about the implications of level one
(basic philosophy) and all too readily make assumptions about level three (culture), which in turn makes
them insensitive to the cultural nuances of each board."

Look Who's Talking, Now!

Australians may have publicly criticised Trujillo for his front-foot tactics, but they are also accused of
having "an attitude" that shows up in exclusionary boardroom practices. When Howard and Kakabadse
taught a program on board effectiveness in Hong Kong recently, some Asian participants referred to
"Fortress Australia", and not in a flattering way. Asian chief executives and chairmen opined that
Australians exaggerate their greatness, wrongly believe they are open minded and are mistaken in
thinking that multiculturalism is their biggest strength. "European, Asian and American markets are more
competitive and less regulated than Australian ones, but we still think we are out there with world's best
practice, although we have not honed our skills in the fierce competition other players abroad deal with,"
notes Howard.

There's a case for questioning the open-mindedness of Australian corporate players, Howard believes.
"We send people abroad as a learning experience, but when they come back we do not necessarily feel we need their input," she says. Data shows that Australian boards are neither gender diverse nor strengthened by foreign directors. "In regards to their skill sets, they are not yet really diverse either," says Howard.

Most Australian board members have a legal, financial or accounting background. "How many on
Australian boards have had big line roles leading people and selling to customers? How many understand the people side of business?" Howard asks. She concludes that Australian boards often are not optimally broad with respect to the people and cultural issues that are critical for organisations' customer focus and employee engagement.

Kakabadse has respect for the Rheinische corporate governance model with its close links between
management and ownership. For example, at car manufacturer BMW, the founding Quandt family still
plays a big role in monitoring the company's strategy. In such structures, firms see themselves as part of a community and therefore regard people as assets. The ensuing long-term perspective is a more sustainable way of generating wealth, he concludes. Nevertheless, the short-term US approach of seeing employees as costs and mainly aiming for profit is making ground worldwide.

The US governance model suffers from the classic agent problem as it focuses on ensuring investors'
money is used in the best interest of the shareholders, claims Kakabadse. And monitoring is difficult in a
system where – in 76% of cases – the positions of CEO, chairman and president are held by one person.
The reasons for this idiosyncrasy are historic, he says. "The US political system is a presidency and US
economic wealth creation is also organised as a presidency – only the latter is missing the two houses of a proper democracy." According to Kakabadse's research, 85% of US board members have never met the managers of the companies on whose boards they sit. Since most US boards are comprised mainly of non-executive directors, often the CEO is the only manager of the corporation in question who's on the
board. And, when choosing a non-executive director, the research shows US chief executives' preferences are for appointing another CEO who will empathise with, rather than challenge, the incumbent.

This lack of checks and balances has resulted in many attempts to rein in the wealth creation machinery
with legislation. Sarbanes-Oxley was a reaction to the scandals at Enron or WorldCom; the Obama
administration's latest Dodd-Frank bill tries to deal with the fallout from the Lehman Brothers implosion.

"This emphasis on litigation in the US corporation has created some of the most inhibited boards we
encountered," says Kakabadse. In the US, political correctness, paperwork, legal procedures and
compliance take precedence, leaving directors little time to deal with anything else, Kakabadse points out.

So, are these laws effective? Statistically the greatest amount of fraud occurs in the US and Great Britain,
the places with the most legislation in regard to boards. "The US system may be more transparent than
others, but the down sides of a short-term, profit-driven philosophy cannot be controlled by legislation,"
Kakabadse says.

The UK has a better balance of power. Today, the same person holds the roles of chairman and chief
executive or president in only 3% of all publicly traded UK corporations. Still, of those who sit in the

"In my view, the manageable maximum is either two chairmanships or four non-executive seats. But I know a person in the UK with 14 chairmanships," says Kakabadse. The Rheinische model is different. German law allows only 10 board memberships per person and each chairmanship counts twice.

In Australia, a source of strength comes from the common view that directors holding more than four
board memberships may become dysfunctional. Kakabadse also lauds the great liberty to be outspoken in Australia and the non-athletic interpretation of teaming: in a board, teamwork means open dialogue; in
football, it means co-operation. "In the boardroom, you may be a good team player by voicing dissent."
Gender, Race and Unions

The Australian decision not to legislate quotas for female board members to date is a good one,
Kakabadse believes. The well-meant precedent by Norwegians to mandate a minimum of 40% female
non-executive board members in all publicly traded organisations is counterproductive in his view. "The
Scandinavians are unable to make this work since they did not build the capacity of female top managers
first," Kakabadse asserts. "A law that's about numbers and not skills will inevitably fail." Howard believes
that setting targets for gender diversity on Australian boards may present a more effective alternative at
this point.

In most of the regions researched, boards are not particularly well regarded, the researchers found, but the worst lack of respect they encountered was in South Africa. "Boards in South Africa are not respected by management and the least respected role belongs to the chairman," says Kakabadse. The political issue of race influences all aspects of life and board memberships are often still mixed up with old colonial money. "Many do not want to let go of their old powers. Therefore, whatever a South African board wants, the management is likely to try to ignore," warns Kakabadse.

Similar avoidance occurs on German two-tier boards where management often tries to work around the
unions. In Germany, the non-executive or supervisory board of large corporations is composed of 20
members, 10 of whom are elected by the shareholders, while the other 10 are employee representatives.

"The result is sometimes ridiculous," says Heiner Thorborg, an executive search consultant in Frankfurt
who specialises in identifying independent board members for German corporations. "Not only does the
employee representation create big supervisory boards that are blown out of proportion, but it also
provokes two levels of communication – some issues are discussed with the unions present, other stuff
has to be dealt with over dinner or a round of golf." But Kakabadse says this is commonplace: "There's
the same tendency to discuss issues over a beer and not at a formal meeting in the UK or the US,
particularly when independent directors want to challenge the CEO."

One of the professor's conclusions is that board members need to understand levels one and two of their
boards – directors' dealings with structures and protocols need to be as decisive as their approach to
finance and risk. "But real boardroom masters also make an effort and show some consideration for level
three, the cultural differences," Kakabadse says.

On one salutary occasion when Kakabadse and an Australian friend took part in a board meeting of a
corporation that both knew very little about, the professor was stunned at how much local knowledge his
friend had. "The board listened to everything he was saying. Most of it was not particularly clever – but
they still loved him." Later, the friend confessed to Kakabadse that he had read all the captions of the
photos mounted on the wall on his way to the bathroom. They had revealed the corporation's history and
key values. And, that's all it took to make the other members of this meeting feel understood and

But operating on the third level of corporate governance also comes with a warning about making
assumptions. It may be a myth that Western organisations can learn to understand how Chinese boards
really operate, suggests Kakabadse. "Every board is different – and sometimes the differences between
two boards in the same country are even greater than the differences between boards in two very different parts of the world."
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