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«Abstract This paper examines the internationalization of Nordic company boards during 2001-2008. Until recently, most firms in Scandinanvia and ...»

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From Global Firms to Global Boards?

A later version of this paper is published as

Oxelheim, L., Gregorič, A., Randøy, T., & Thomsen, S. (2013). On the internationalization of

corporate boards: The case of Nordic firms. Journal of International Business Studies, 44(3), 173-


Lars Oxelheima

Aleksandra Gregoricb

Trond Randøyc

Steen Thomsend


This paper examines the internationalization of Nordic company boards during 2001-2008. Until recently,

most firms in Scandinanvia and elsewhere had purely domestic boards despite the global reach of their business. However, during the last decade Nordic company boards have begun to change. Using Poisson pooled and panel estimators we find that financial rather than commercial internationalization drives board internationalization. The effect of commercial internationalization – in terms of sales and foreign operations - is positive but not significant. We find the same results when we enlarge the definition of board internationalization is extended to national directors with international experience related to boards,, work or education. However, we find no evidence that the internationalization of boards is limited by conservatism of existing national board members, language barriers or “old boys’ networks”.

Keywords: internationalization, international directors, international board experience, board composition, nomination committee, corporate governance.

JEL: F23; G30; G34; L22; M16 a Corresponding author: Lund Institute of Economic Research, Lund University, P.O. Box 7080, 220 07 Lund, Sweden. E-mail: lars.oxelheim@fek.lu.se b Center for Corporate Governance, Department for International Economics and Management, Copenhagen Business School, Porcelænshaven 24, DK-2000 Frederiksberg, Denmark. E-mail: agr.int@cbs.dk c University of Agder, School of Management, Serviceboks 422, Bygg H, N-4604 Kristiansand, Norway, E- mail: trond.randoy@uia.no d Center for Corporate Governance, Department for International Economics and Management, Copenhagen Business School, Porcelænshaven 24, DK-2000 Fredriksberg, Denmark, E-Mail: st.int@cbs.dk 1

1. Introduction Until fairly recently, most multinational firms had largely domestic boards despite the global nature of their business activities. Swedish Ericsson, for example, or Finnish Nokia, started internationalizing their operations in the first half of the 20th century, but kept purely domestic boards up to 1996 and 1997, respectively. This lopsided internationalization raises challenging questions for research and practice. Are these truly multinational companies or monolithic giants dominated by old boys networks from their host countries? If internationalization is so important, why is it not practiced in the board rooms?

The above questions invite a rethinking of the function of international board members.

What is their role? Do they exercise control? Or do they give advice and form valuable networks? The first role is associated primarily with the suppression of agency conflicts on behalf of investors, while the second function is associated primarly with a service role as part of a managerial team. In this paper, we propose that board internationalization is driven primarily by investor relations, whereas operational business needs to a greater extend support appointments of board members with international experience.

We examine the drivers of board internationalization in the Nordic countries (Denmark, Finland, Norway, Sweden), which have the world’s highest incidence of multinationals (UNCTAD, 2008) and mostly begun internationalizing their boards recently. Arguably, these small open economies should have more need of international directors than other countries because of extensive internationalization and a relative scarcity of domestic candidates. Nevertheless, until recently, there were relatively few international directors on Nordic boards. However, the picture changes somewhat when we - as a novel contribution to the literature - consider an alternative dimension of national diversity: the international work, board or study experience of the national members. In fact, persons with such experiences make up around 40 percent of the Nordic boards.

1 We formulate the hypotheses concerning board internationalization based on an analysis of the factors influencing the demand and supply of international directors. Testing these hypotheses on the population of non-financial firms listed in the Nordic countries during 2001-2008, we find that international board membership is caused primarily by financial drivers, such as foreign ownership and foreign listing, rather than by business drivers, such as foreign sales. More specifically, using Poisson estimators on a final sample of 382 firms for which financial and board information was available over the entire 2001period, we find a clear and robust pattern. Firms with a higher percentage of foreign ownership, and firms whose shares are traded on non-national (mostly European) stock exchanges, have a higher number of international board members. The effect of commercial internationalization is positive but not significant across all specifications.

The results improve slightly if we go beyond directors’ nationality and widen the definition of the board internationalization to include national directors with international work and board experience, or foreign education.

We also examine whether the conservatism of an “old boys’ network” reduce board internationalization, but find no evidence of this. On the other hand, we do observe that the presence of an international director on the firm’s nomination committee motivates more appointments of international directors to the board. In line with our expectations, a higher number of international directors is observed in larger firms and firms with larger boards.

The rest of the article is organized in the following way. We review the scant existing literature in section 2. Our theory contribution and hypotheses are presented in Section 3.

In Section 4, we discuss the Nordic corporate governance system and the trend towards internationalization of Nordic company boards. In Section 5 we present the methodology used, our definitions of variables and the data. Our results are presented in Section 6.

Finally, concluding remarks are given in Section 7.

2. Literature Review

2 Despite its practical and theoretical importance, research on the association between internationalization and corporate governance has been largely neglected in the past (Sanders and Carpenter; 1998, Olie, 2010). The existing studies primarily concern US firms and examine nationality of the CEO or the management team - rather than the board.

In a recent survey, Olie (2010) names three studies that examine the antecedents of the internationalization of the top management teams. Greve, Nielsen and Ruigrok (2009) examine the impact of internationalization on the configuration of management teams of 41 large European banks and insurance companies. They find that firms match “managers with strategies” in the internationalization process. Van Veen and Marsman (2008) examine internationalization of management teams of 363 European Multinational Corporations in 2005. They find very limited international diversity, but substantial differences between European countries, which they interpret as a result of country corporate governance regimes rather than company characteristics. Stafsudd (2006) studies the characteristics of the senior executives in a small sample of the largest Swedish corporations in 1999. She reports that only 5 percent of the senior executives are non-Swedish, while the share of international executives in the top management team is a little bit higher – 10 percent. She argues thus under-representation of international members is attrubtable to socalled “homosocial reproduction” - i.e. that board members recuit board members of the same type (gender, nationality, education etc.).

Ruigrok, Peck and Tacheva (2007) examine the demographic characteristics of international directors in a sample of 210 publicly listed Swiss firms in 2003. The find that international directors are more independent and have fewer board seats in Schwitzerland. In the same sample Ruigrok Peck, Tacheva, Greve and Hu (2006) show that international membership of the nomination committee increases the frequency of

international directors. This latter effect could also reflect reverse causality, however:

since nomination comittes are composed of directors, a higher number of international 3 directors makes it is also more likely that one of them will be elected to the nomination committee.

Masulis, Wang and Xie (2010) examine the impact of international independent directors, i.e. independent directors with the domicile in a foreign country, on the governance and performance of S&P 1500 companies during 1998 to 2006. At least one independent international director is present in nearly 13 percent of their sample firms; in these firms, international independent members occupy about 18 percent of total board seats. Masulis et al. (2010) find that these directors improve the performance of companies with significant activity in the director’s home region, and increase abnormal returns of international acquisitions if they take place in the home region of the international board member. They also find that stock markets react more favourably to international M&A in companies with international independent directors. However, international independent directors are more likely to be absent from board meetings. Boards with international directors are also more likely to misreport earnings and to overpay their executive. In other words, international directors may not be efficient monoritors. In fact Masulis et al. (2010) find a negative effect of international board membership on firm value and accounting profitability, and observe negative stock market reactions to announced appointments of international independent directors. They conclude that not all firms will benefit from hiring an international director and therefore advocate a careful case by case analysis of costs and benefits of international hires. In this paper, we respond to their call for a careful consideration of the costs and benefits of international directors.

A few studies have examined the impact of internationalization on governance more generally. Sanders and Carpenter (1998) find that large US firms react to internationalization by increasing the size of the management team, higher and more long term CEO pay as well as separating chair and CEO. In a sample of the largest US and European firms in 2005/2007 Rivas, Hamori and Mayo(2009) find that business internationalization tends to lead to boards with longer tenure and more international experience, but lower average age.

4 As a footnote to this literature, we prefer to speak of “international directors” instead of “foreign directors”- a term that is widely used in the literature. In addition to avoiding any implicit xenophobia in the distinction between say “Scandinavians” and “foreigners/strangers”, the term international director is more precise. A director with a foreign passport is not necessarily “foreign”. She may. for example, have lived in the host country for decades - or even all of her life. To avoid confusion we have nevertheless decided to keep other classic terms like foreign sales and foreign ownership..

3. Theory development

Theorizing on the recruitment of international directors must arguably begin with the fundamental issues of supply and demand. Why do shareholders demand international directors? Why do directors accept seats on the boards of international companies? We propose that the demand and supply of international directors is influenced by commercial and financial internationalization of the firm, firm size, system effects and other factors.

The demand for international directors. According to the current theory, non-exective directors fullfil both control and service functions (Shleifer and Vishny, 1996; Becht et al., 2002; Tirole, 2006; Adams, Hermalin and Weisbach, 2010). The control function, which is highlighted in the agency theory (Fama and Jensen, 1983), consists chiefly in monitoring company managers on behalf of shareholders. With regard to this function, the “information economics” argument described by Sanders and Carpenter (1998) advocates that increased complexity from internationalization increases the asymmetry of information between the manager and the board, which in turn justifies an increase in the number of international members. The service role consists in giving advice and fostering network ties, which can lead to better decisions and open up new business opportunities (Johnson et al., 1996; Daily et al., 2003; Pfeffer and Salancik, 1978; Stearns and Mizruchi, 1993). International directors may be valuable in both respects, if they are better able to understand the business environment and compare the firm to global 5 competititors. In particular, the ability to source directors from all over the world should give the company a larger set of qualified candidates. Moreover, signaling theory (Scott,

2001) may explain why the appointment of international directors may be a positive signal to international employees and customers.

On the other hand, international directors may find if more difficult to exercise effective control because of both geographical and cognitive barriers (Coval and Moskowitz, 1999, 2001; Masulis, Wang and Xie, 2010). This implies that international directors will be especially valuable in service functions, particularly when the company has extensive operations in their home region. Masulis, Wang and Xie (2010) find this to be the case.

At the most basic level, we therefore hypothesize that a higher degree of commercial internationalization - as measured by a higher share of foreign sales in total sales – requires a higher number of international directors.

Hypothesis 1: The higher the proportion of foreign sales in relation to total sales, the higher the number of international members on the board.

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