As the world becomes more globally interconnected, companies may wonder whether their boardrooms should become more global as well. Recent research from Fei Xie, associate professor of finance for the University of Delaware’s Alfred Lerner College of Business & Economics, contributes to this debate on corporate globalization by examining the effects of foreign directors on corporate governance and firm performance.
In his research, Xie found that about 13 percent of large U.S. public corporations have foreign independent directors (FIDs) serving on their boards. His research suggests that these FIDs can have positive and negative influences on boards, but found that FIDs tend to be less of an asset than a problem for companies.
“Our evaluation of the overall effect of FIDs on firm performance shows that firms with FIDs are associated with significantly poorer performance, especially when they do not have much business presence in their FID’s home region,” states the abstract of Xie’s research, “but FIDs make increasingly larger contribution to firm performance as a firm’s operation in the FID’s home region becomes more important.”
According to Xie, the board has two major functions: to hire, fire, and compensate managers, what he calls “the monitoring role,” and to advise managers on important strategic decisions, what he calls “the advisory role.” The efficacy of directors in performing these two roles determines how well the board will make corporate decisions and what the company’s value will be to shareholders.
Since the directors are so important in the overall success of a company, it is important to know exactly how well they will perform in these roles. FIDs are, by definition, independent directors who are living in foreign countries. While FIDs tend to have an excellent grasp of the business opportunities and challenges of their home countries, they tend to have poorer performance overall, Xie said.
“Foreign independent directors are apt to be less effective than U.S.-based independent directors and thus, they could weaken a board’s monitoring effectiveness,” Xie writes.
Ultimately, Xie concludes, FIDs have both benefits and downfalls. However, since FIDs have “lower meeting attendance records, and firms with FIDs on their boards tend to pay their CEOs excessively high compensation and are more prone to commit financial misreporting that requires future restatements,” Xie said they can undermine the effectiveness of boards.