National diversity in board of directors and the distribution of international equity affiliates

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Angeliki Galanopoulou

10603204

29 August 2015

MSc Business Administration: International Management

version Master Thesis

Supervisor: Dr. Niccolo Pisani

Second Reader: Dr. Johan Lindeque

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Statement of Originality

This document is written by Student Angeliki Galanopoulou who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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ABSTRACT

Extensive research has been conducted about the characteristics of the board of directors and on how these characteristics affect the strategic decision-making process of the firms. In this field national diversity as a board characteristic is relatively unexplored, especially in relation to internationalization matters and corporate governance systems. Recent findings demonstrate that members in the board of directors who have from different nationalities bring valuable assets to the companies. This thesis examines the affecting role of the national diversity in board of directors on internationalization strategies. Moreover, this study focuses on the affecting role of the different corporate governance systems in national diversity in the board of directors. Using a sample of the Global Fortune 500 as listed in 2012 it has been found that national diversity is positively related with higher levels of internationalization and that the Japanese corporate governance system limits the national diversity in the board of directors. The findings of this research provide managerial implications for firms with global focus which want to achieve higher levels of internationalization.

Keywords: board of directors’ national diversity; internationalization; corporate governance

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1. INTRODUCTION

Globalization has been an important topic for many scholars of international management. Globalization is a phenomenon that can be narrowly defined “as the international integration of markets in goods, services, and capital.”(Garrett 2000, p. 941). Many authors claim that globalization is a phenomenon that has several dimensions; economic, social, cultural, political, environmental etc. (Ghemawat, 2014; Ghemawat Pankaj & Pisani, 2013; Rugman & Brain, 2003)). The degree to which people, countries and companies are integrated in the globalization process varies, and this affects all the different dimensions of globalization. Globalization plays a crucial role on how multinational and domestic companies develop and especially on the level and pattern of their international expansion.

Companies have to face substantial complexities operating in foreign environments that limit the levels of internationalization. According to Lu and Beamish (2004) internationalization is the degree to which a firm is present through subsidiaries and exports in several countries. Internationalization strategies have been drastically affected by globalization. The business boundaries are diminished, international presence is a necessity for every contemporary company, and the corporate boards are of crucial importance regarding the decision-making process in internationalization matters. However, internationalization is a quite challenging process for the majority of the firms.

Although multinational enterprises (MNEs) are the driving forces of the globalization, only a small number of the biggest MNEs are truly global (Rugman & Brain, 2003; Rugman &Verbeke, 2004;). Rugman and Verbeke (2004, p. 3) argue that “most of these firms are not ‘global’ companies, in the sense of having a broad and deep penetration of foreign markets across the world. Instead, most of them have the vast majority of their sales within their home leg of the ‘triad’, namely in North America, the European Union (EU) or Asia.”

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The modern business world is driven by globalization that demands companies to adapt to this changing environment; however the challenges that firms have to face in order to achieve dispersed international diversification are many hence some important questions are being raised. What are the most important driving forces in the creation of global MNEs? Who or what affects internationalization strategies? Certainly there are many determinants but in this research we are going to focus on one important force.

• The governance structure of the biggest MNEs in the world under the different corporate governance systems.

Corporate boards retain the internal control of the companies and their main roles are advisory, service and monitoring (Masulis, Wang & Xie, 2012). The composition and the role of the Boards of directors are a well-studied field in the international management literature (Adams, Hermalin & Weisbach, 2010; Johnson, Schnatterly & Hill, 2013). However, board internationalization is a field that remains relatively unexplored especially in relation to the internationalization process of the firms. We define board internationalization as the degree to which the board members differ in terms of nationality.

Previous studies have provided some important findings in regard to the internationalization of the corporate boards (Oxelheim, Gregoric, Randoy & Thomsen, 2013; Staples, 2007). Oxelheim et al., (2013) examine the Nordic companies and find a positive association between the national diversity in the corporate boards and the internationalization process of the firms. Staples (2007) claims that corporate boards tend to become more global during the last years. However, the author does not examine how these corporate boards affect the decision-making process of firms.

Companies adapt different corporate governance systems according to which the corporate boards have different functionalities and composition. Corporate governance is defined in the study of Cromme (2005, p. 366) as “a term describing good, efficient

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management and supervision of companies on the basis of internationally recognized standards in the interests of the company’s owners and its social environment”. There are three main corporate governance systems; the Anglo-Saxon, the Rhineland and the Japanese. These systems refer to the direction and control of the companies and each one has different characteristics.

The Anglo- Saxon system focuses on the maximization of the shareholders value. The financial needs of the company are fulfilled through the capital markets, and the boards of directors serve solely the investors’ interests (Aguilera & Jackson, 2003). On the other hand, the Rhineland system focuses on the stakeholders’ interests. The financial needs of the companies are fulfilled through the banks, and the corporate boards have the ultimate control and monitoring of the companies (Aguilera & Jackson, 2003). Finally, the Japanese model has elements from both the Anglo-Saxon and the Rhineland model but it shares some common attributes with the Rhineland’s. The main difference in the Japanese model is that the boards of directors do not have a significant contributory role in the company’s management. The election of the board members is a reward for the end of their career (Williams, 2000).

As we see the functionality of the board of directors has a different application for each system, affecting accordingly the governance of the companies. Internationalization strategies are of major importance for the companies and their formulation depend on the different corporate governance systems. Further discussion on this subject will be presented in later chapters.

The aim of this thesis is to provide some new findings in the international management literature by giving answers to the following questions:

• Does the national diversity in the corporate boards affect the internationalization decision-making process of the biggest companies of the word? If yes, is it positive or negative?

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• How do the different corporate governance systems affect the national diversity in the corporate boards?

We are going to examine the degree to which the national diversity in the board of directors is related to the strategic choices of the firms in the three corporate governance systems. We will analyze data from the Fortune Global 500. We are interested in these enterprises because they represent the core globalization MNE system. Furthermore, this sample includes companies using the Anglo-Saxon, Rhineland, and Japanese corporate governance system.

A deeper understanding of the relationship between the strategic pattern of the big multinational companies and the role that the boards of directors play in it is of great importance for the international management literature. Scholars can interpret the results for further research regarding globalization matters and transnational corporations. Companies can have further insights on how the composition of the board of directors affects the strategic choices in internationalization matters. This study will contribute further knowledge to a subject that is not fully investigated within the international management literature.

This thesis is divided in six sections. In the second section we provide an overview of the existing literature on board and firm internationalization as well as on the role of the different corporate governance systems. In the third section we introduce our theoretical argumentation to support the development of our hypotheses. In the fourth section we present our methodology and an explanation of the variables and data used for the analysis. Finally, in the last section we present the results and we summarize our key findings.

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2. LITERATURE REVIEW

In the past, a number of studies have analyzed the boards of directors regarding their impact on firm performance, on corporate governance and on other aspects including the globalization of firms (Staples, 2007; Masulis, et al., 2012; Ellstrand, Tihany & Johnson 2002; Oxelheim et al., 2013; Oxelheim & Randoy 2003; etc.). These studies have provided important findings concerning the role of corporate boards in governing a company. This research is going to focus on some important aspects that previous studies did not examine. Some of these aspects are the concept of semi-globalization and its implication, the role of the different corporate governance systems, and an analysis of the structure of the board of directors of the biggest multinational companies of the world. We want to examine new concepts and relationships in order to provide new findings. In this chapter we are going to give an overview of the research studies and their limitations in relation to our research topic. Although the concept of globalization started almost seventy years ago, we are not leaving in a real globalized world. The concept of semi-globalization captures more precisely the reality that our modern societies are facing. If we want to define what semiglobalization refers to, then we will use Ghemawat’s (2003, p.138) explanation: “But a review of the economic evidence about the international integration of markets indicates that we fall in between these extremes, into a state of incomplete cross-border integration that I refer to as semiglobalization. More specifically, most measures of market integration have scaled new heights in the last few decades, but still fall far short of economic theory's ideal of perfect integration.” Moving towards globalization, internationalization strategies are of major importance for researchers. The concept of globalization demands from companies to achieve greater levels of international expansion and market integration. Big multinational corporations can be used as important indicators of whether we live in a real globalized world or not.

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Semiglobalization and whether companies are truly global is a subject that has been investigated by many authors (Ghemawat, 2003; Ghemawat & Pisani 2013; Rugman & Brain 2003). Even if in our days there are many indicators that the world is more globalized than ever, we are still far from the perfect international integration of markets, goods, services, and capital. A careful analysis of the biggest MNEs supports this argument. Rugman and Verbeke (2004) in their study conclude that very few MNEs, only 9 out of the 500 largest companies, have a broad network of foreign markets and equal amounts of profits within this network. The majority of the 500 companies have the biggest percentages of profits in the “Triad Power” which is North America, European Union and Asia. This phenomenon is also proven in a most recent study, that of Ghemawat and Pisani (2013). It is argued that even if the biggest 500 companies of the world have achieved greater levels of international expansion, the bulk of their activities are still at home or in countries close to their region. As mentioned in the above studies even the biggest multinational companies of the world face challenges in order to become truly global and achieve a high degree of internationalization worldwide.

According to Walt and Ingley (2003), the composition of boards with members of different nationalities is not a simple process. Diversity is one of the most important elements of globalization and in corporate boards it may take different forms. Milliken and Martins (1996) argue that diversity in the corporate boards can be presented in very different ways and some examples include the ethnicity, culture, professional background, knowledge, commercial and industry experience, career and life experience. Westphal and Milton (2000,

p. 366) claim that board members, even if they differ in the majority of the above elements,

may not represent really diverse boards as they come from elites with common characteristics such as, education, lifestyle, work experience etc. According to the authors, even if the corporate boards are nationally diverse, the members will share similar views to strategic choices and internationalization matters.

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A study that provides contradictory results regarding the last argument is the one of Oxelheim et al., (2013). The author concludes that there is a positive relationship between the internationalization of the firms and the composition of the boards with foreign members. Companies with high degrees of international expansion were found to have more foreign directors and national directors with international experience in their corporate boards. Furthermore, it is claimed that foreign shareholders prefer to be represented by foreign directors belonging to their relative network in order to feel more secure regarding their representation of their interests. More specifically, the foreign shareholders prefer to have the same nationality as the foreign directors (Oxelheim et al., 2013). It is interesting that in this study firm internationalization is measured not just with the percentages of sales and the volume of production in foreign countries (Dunning & Lundan, 2008), but it incorporates the degree of foreign ownership in a company as well as the company’s shares in foreign stock exchanges. These aforementioned factors are important indicators of firms’ internationalization. The author, by using these factors, makes the results of the study more reliable and insightful, as the study is quite recent. However, we see some important limitations in order to generalize its conclusion. The data collection was made between 2001 and 2008 in a sample of 346 non-financial listed Nordic firms. Apparently, during the last six years, several things have changed in the economic world and especially due to the economic crisis. Furthermore, this study explicitly investigates companies from the Nordic countries, which share common characteristics. The sample is not diverse, so conclusions cannot be generalized and can only be applied for companies in the Nordic countries.

Staples’s (2007) research provides insights regarding the degree of board globalization in a sample of 80 companies of the World’s largest TNCs between 1993 and 2005. The study concludes that board globalization, meaning the composition of the board with non-national directors, is a “trend” that occurs more and more in big multinational enterprises. The author

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claims that in the 1990s the world’s biggest multinational corporations had a percentage of 35 per cent of non-national members in the corporate boards, while in 2005 there was a substantial increase in the percentages, which reached to 70 and 80 per cent. According to Staples (2007), the main reason of this increase relies on mergers and acquisitions, as they are one of the main reasons that foreign members enter boards of directors. We can argue that the aforementioned increase in the percentages is a phenomenon that indicates a positive relationship between the internationalization process of the companies and the internationalization of the boards. However, this positive association is a result of the globalization of the firms rather than the internationalization of the boards of directors. It is essential to mention that even if the percentages indicate a significant increase of foreign members in the board of directors, the majority of the companies have barely 26 per cent of foreign directors in their board composition. This study causes an important doubt of whether mergers and acquisitions are the main reasons of moving towards more globalized boards or the opposite. The low percentages of the boards of directors generate questions about the influential role in the internationalization process of the firms.

Several studies indicate (Nemeth, 1986; Smith, Smith, Olian, Sims, O’Bannon & Scully, 1994; Hambrick, Cho & Chen, 1996) that demographic differences amongst the board members have a negative impact in the social cohesion of the group. Furthermore, the opinions and viewpoints of minority members cannot substantially influence the decision-making process of the boards.

A most recent study, that of Masulis et al. (2012), has in its core interest the board globalization and specifically the effect of the foreign independent directors (directors located in distant countries from the headquarters) in the firm performance and governance. The research concludes mostly in negative results regarding governance matters. Governance can be problematic in many aspects, especially in misreporting and in meeting attendance due

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to distance (Masulis et al., 2012). The most notable point in this study, which is also apparent in Staples’s study (2007), is the positive association of the board internationalization with the process of mergers and acquisitions.

As we mentioned in the previous chapter, corporate governance systems are of great importance in our study. Each country has different institutions, which formulate different corporate governance systems. Corporate governance refers to all the different mechanisms -cultural, legal, institutions - which stakeholders and owners have, so that they can keep control of the company and more specifically of the management and the corporate insiders (Oxelheim & Randoy, 2003, in Shleifer and Vishny, 1997; John and Senbet, 1999; Peace and Osmond, 1999). In the rest of this chapter we are going to review some articles whose core interest is corporate governance systems and their internationalization, FDI decisions and the specific composition of boards of directors.

Aguilera and Jackson (2003) argue that internationalization strategies have an impact on the configuration of the different corporate governance systems and more specifically on the institutions that shape these systems (Aguilera & Jackson, 2003, in Guillen, 2000; Rubach & Sebora, 1998; Thomas & Waring, 1999). The study concludes with some implications regarding the aforementioned relationship. Institutional changes can occur from international pressures derived from internationalization. However, the alterations are of a small scale without affecting the whole corporate governance system. Although the effect of internationalization is not significant, it has created a need for “hybridization” in the different corporate governance systems. The authors claim that when some practices are generated under a specific national context and then they are conveyed to another one, adaptations and alterations occur so that these practices can be adopted in the different context (Aguilera & Jackson, 2003, in Pieterse, 1994:165). We can get useful insights regarding the effects that internationalization can create in the different governance systems. However, our aim is to

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examine how the different corporate governance systems affect the national diversity in the board of directors and consequently internationalization strategies.

Lien et al. (2005) examine the influential role of corporate governance in FDI decisions or, in other words, the effect of the corporate governance in internationalization strategies in emerging markets. Strategies regarding FDI decisions are made by the corporate boards (Lien at al., 2005) and there is an important effect between the board composition and the strategic decision-making of companies (Lien at al., 2005, in Hoskisson et al., 1994; 2002). The findings of the study suggest that there is a positive association between corporate governance and FDI decisions. However, the influence of the board characteristics on the decision-making process regarding internationalization strategies seems not to be statistically important. Liens at al. (2005) provide us with negative insights as far as our research topic is concerned. However, the research examines the emerging countries and national diversity is not examined as a board characteristic.

Another research that focuses partly on the above limitation (national diversity) is the one of Oxelheim and Randoy (2003). The authors examine among other things how the corporate governance of Sweden and Norway, which is closely related to the Rhineland system, can be influenced by the Anglo-Saxon system. The research supports that by including foreign members (Anglo-American) in the board of directors “is a ‘‘step’’ forward in a firm’s globalization process”(Oxelheim & Randoy, 2003). The study contains interesting findings. Foreign members (non-national) in the corporate boards can add value to domestic firms, and most importantly, they can attract foreign investors as they represent a signal that the corporation is moving towards globalization and openness (Oxelheim & Randoy, 2003). Although the findings are interesting and closely related to our research topic, the main limitation is that the research is focused solely on two countries. The study fails to capture what the results would be if all the different corporate governance systems were examined.

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By reviewing these articles we see that globalization affects the strategies of the companies and especially those regarding internationalization. Multinational corporations become more global (Ghemawat & Pisani, 2013; Rugman & Brain, 2003; Rugman & Verbeke, 2004) and corporate boards play a crucial role in this process. Most of the studies do not examine the degree to which corporate boards are globalized. Oxelheim’s et al. (2013) and Staples (2007) provide some important findings in regard to our research and their focus is on the internationalization of corporate boards. The authors indicate a positive relationship between the internationalization process of the firms and the national diversity in the corporate boards. However, there are some important limitations. The sample of Oxelheim’s et al. (2013) study is not diverse and we cannot generalize the findings. Staples (2007) and Masulis et al. (2012) leave us with a doubt whether this positive association comes from the need of mergers and acquisitions or from the internationalization of the corporate boards.

Regards to the different governing systems, the published studies fail to capture the effect of the corporate governance on board composition (in relation to national diversity). The articles reviewed in this chapter provide us with useful insights into the effects of corporate governance in internationalization but not into the corporate boards (Aguilera & Jackson, 2003; Lien et al., 2005). Therefore, this study aims to provide important insights by investigating the relationship between national diversity in the board of directors and the distribution of internationally equity affiliates using a sample of the biggest multinational companies of the world. Additionally, this research wants to examine how the different corporate governance systems affect the national diversity in the board of directors.

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3. THEORETICAL FRAMEWORK

In this chapter we provide a theoretical answer to our research question by analyzing the relationships among the corporate boards, the internationalization process of the firms and the corporate governance systems.

3.1 Corporate boards and their role in the strategic decision-making of the firms.

Multinational companies following the demands of globalization need to become more competitive by enhancing their dynamic capabilities. These capabilities will enable them to overcome uncertainty and complexities derived from the foreign environment (institutions, cultural distance, new markets etc.) and gain a strong and competitive position in foreign markets. Boards of directors have an important role in this process as they influence the strategic direction of the companies.

Corporate governance is a field that has attracted the interest of many researchers, as it plays a very important role in the way by which companies are governed. If we want to realize and identify the influential role of corporate boards in the strategic decision-making process of the companies we need to elaborate on their role, attributes and structure.

There are three dominant theories behind the relationship of the boards of directors and firm performance - agency, resource dependence and upper echelons theories – The first two theories define the key roles of the corporate boards through two different perspectives. Agency theory identifies as the key role of the boards to monitor the management team, while the resource dependence theory sees corporate boards as a means that provides valuable resources such as advice, legitimacy, connections with other organizations etc. (Hillman & Dalziel, 2003). Lastly, the upper echelons theory supports that the strategic decisions of the top management executives are mostly influenced by their personal views, beliefs, experiences and personalities (Hambrick, 2007).

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Board composition is something that resource dependence and agency theory identify differently. On the one hand, agency theory belief is that the board composition serves mostly the interests of the shareholders by monitoring the actions of the management team (Adams et al., 2010). On the other hand, resource dependence theory belief is that the board composition should have members that provide all the necessary resources so that they can help the company to adapt in the external environment (Hillman, Withers, & Collins, 2009). We develop our arguments using the resource dependency and upper echelons theory in order to identify the relationship between board and firm internationalization. Under the lens of these two theories we examine the aforementioned relationship by seeing board members as providers of unique resources. (Hillman & Dalziel, 2003).

In the study of Oxelheim et al. (2013) it is stated that boards of directors have three main roles; monitoring, advisory and resource provision. The monitoring role has to do with the selection and the management of the top executives of the company. The advisory role is related to the firm’s strategic decisions (Oxelheim et al., 2013; in Adams et al., 2010) and the last term – resource provision – is the capability of the board members to ensure that the company has access to important recourses, information and institutions legitimacy (Oxelheim et al., 2013; in Pearce & Zahra, 1992; Pfeffer & Salancik, 1978).

Every member in the board of directors has unique characteristics. Adams et al. (2010) argue that every corporate board has its own dynamics; the members have different personalities, backgrounds, incentives and connections. The unique attributes of each member make up a team with its own dynamics that affect the different roles of the board.

A non-national member has very different attributes compared to those of a national one. For instance, a foreign member has developed a different network of connections outside the familiar circle of the national members. This could be of major importance for the resource provision role of the board as new network of connections can be a valuable asset for

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a company especially for internationalization matters (Oxelheim et al., 2013). As for the advisory role of the corporate boards, a non-national member has significant international knowledge in the business world that can add value to the strategic decisions of the company. These international insights include; international working experience in different formats, familiarity with other corporate governance systems, and knowledge of foreign markets and a better understanding of international complexity. These insights can be proved valuable for the corporate boards in order to identify new opportunities in regard to internationalization strategies.

Oxelheim and Wihlborg (2008) suggest that multinational corporations face operational complexity due to the uncertainty in international environments. An important argument stated by Sanders and Carpenter (1998) is that internationalization strategies generate information asymmetry between the firm, the boards and the managers. Uncertainty caused by the liability of foreignness and information asymmetry can have very negative impact on the performance of the companies and most importantly on the strategic decision-making process in regards to internationalization matters. Corporate boards that lack knowledge and information in international environments will face important difficulties in driving the company to high degrees of internationalization. Foreign members can help the boardrooms to overcome these complexities by contributing their international insights, knowledge, and experience in matters that the rest of the members have difficulties with. We believe that foreign members (non-national members) in the corporate boards will enable companies to achieve higher degrees of internationalization as they offer valuable resources.

Hypothesis 1: National diversity in the board of directors is positively related with the

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3.2 Corporate governance systems and their influence in the composition of the boards of directors.

In this chapter we analyze the different corporate governance systems at the level of countries and firms so that we can draw our arguments on the extent that these systems affect the composition of the corporate boards and consequently their decision-making process. As we discussed in previous chapters global competition is a reality for all the big multinational companies and the corporate governance context plays a significant role in order for firms to achieve a competitive global position.

Several studies propose that there are four different corporate governance systems (Weimer & Pape, 1999; in Scott, 1985; Moerland 1995a,b; Weimer, 1995;) the Anglo-Saxon, the Rhineland, the Japanese and the Latin. In our research we are going to focus in the first three systems as the Latin is closely related with the Rhineland (Weimer & Pape, 1999).

3.3 Anglo-Saxon corporate governance system

The Anglo-Saxon corporate governance system is characterized by long-term financing from corporate bond markets, shares are widely dispersed in shareholders, board composition has one-tier structure (executives and non-executives) and finally the most important objective of the firms is to maximize the shareholder wealth. The latter is accomplished through the directors of the boards whose basic responsibility is to maximize the value of the merits for the shareholders. (Van den Berghe, Van der Elst, Carchon & Levrau, 2002, p. 9) This system is found in many counties like the USA, the UK, Australia and Canada.

According to the report of Cadbury in 1992 corporate boards play a crucial role in the governance of companies, as the boards are the ones that direct and control each company. More specifically, it is stated in the report that “the responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their

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stewardship.”

Furthermore, another important part of this report is in regards to the composition of the board with non-executive directors. It is argued that non-executive directors can “bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct.” The existence of non-executive directors in the boards is a crucial requirement for the companies operating in the Anglo-Saxon system that they must comply with. More specifically, it is argued in the report that companies must have at least three non-executive directors in their boards and these members also need to be independent from the company (Cadbury, 1992, p 20). We can see from the above arguments the importance that the Anglo-Saxon system places in diversity and especially in the appointment of members in the boards with diverse characteristics.

We argue that the nationality of the members is a characteristic that can influence substantially the strategic decisions of companies; this argument is thoroughly analyzed in the previous chapter. On the basis of this argument we believe that the Anglo-Saxon system facilitates the internationalization of corporate boards. The Anglo-Saxon corporate governance system promotes diversity and openness and these elements are of major importance for companies that want to grow and expand their operations internationally. This system demands companies to structure boards with members that bring valuable assets. Members with different nationalities can be valuable resources of international knowledge, experience and most importantly a resource of new international networks. We argue that the internationalization of the corporate boards is positively affected by the Anglo-Saxon corporate governance system.

Hypothesis 2:

The Anglo-Saxon corporate governance system is positively related with the internationalization of the corporate boards.

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3.4 The Rhineland Corporate Governance system

The Rhineland corporate governance system has many differences in several aspects when compared to the Anglo-Saxon system. In this system companies are fulfilling their financial needs through banks, the number of shareholders is small and their power and rights are limited (Aguilera & Jackson, 2003). The composition of the corporate boards has a two-tier structure, which means that there are two different boards: the supervisory and the management board. This system is identified in many countries like Germany, the Netherlands, Austria, Finland and Denmark (Jungmann, 2006, p. 427).

According to Jungamann (2006) the major responsibilities of the supervisory board is to select and monitor the members of the management board. In some cases the supervisory boards have the power to intervene in the management when the interests of the company are seriously harmed. Another interesting task of the supervisory board is also networking with stakeholders. Although the above tasks of the supervisory board are important and necessary, the major role of the supervisory board is to supervise and control the management board.

The management boards are responsible for managing the companies’ affairs while shareholders and the supervisory board do not have a major impact in the way that companies are governed. More specifically, Jungamann (2006, p 433.) states “The management board does not only manage the company’s affairs, but also sets up long term goals and guidelines. At least in principle, there is a clear separation between the tasks and responsibilities of the two boards.” However, it is argued that the last years it seems that there is an alteration in the function of the supervisory board. The decision-making process regarding business policies also needs to be controlled by the supervisory board whose members act as “consultants” of the management board. Nevertheless an important paradox is generated in this study that deserves our attention and concerns the interrelationship between the members of the supervisory and management board. Jungamman (2006) states that supervisory board

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members are actually elected by members of the management board. The main reason why this is occurring is because the management board members want to be controlled by supervisory boards that share the similar opinions and strategic directions. In that way the management boards can set the strategic direction of the companies unhindered.

The above elaboration on the role of the boards in the Rhineland system raises some important arguments for our study. There are several differences between the Anglo-Saxon and the Rhineland system and maybe we could say that these systems act in a completely opposite way. The Rhineland corporate governance system is more conservative and this can affect the way in which companies are growing and expanding especially in a world that is moving towards the demands of globalization. Traditionally, companies under the Rhineland system are held from governmental institutions and local banks (Jungamann, 2006, p 433.). Furthermore, the supervisory and management board are fulfilled with members that share the same ideas and do not have diverse characteristics. This is something that limits the openness of the companies to foreign investors and shareholders and sets some serious challenges when it comes to internationalization matters. Although the last years the Rhineland system has proceeded in some important alterations, this system is still characterized by conservativeness. This is something that foreign investors see negatively as the liability of foreignness and the generation of information asymmetry become bigger and bigger. The conservative composition of the boards creates uncertainty to foreign shareholders and investors on whether they can feel secure that their rights are represented effectively. This is a very important concern, which limits the expanding capabilities of the companies, as foreign members can enter the boards with difficulty.

The internationalization of the corporate boards in companies under the Rhineland corporate governance system is a difficult process. The conservative structure of the boards does not facilitate the process of globalizing the boardrooms. Non-national members are

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difficult to enter the supervisory boards and if they enter their power will be limited. Furthermore, members with different nationality cannot easily enter the management boards. The members of the management boards are usually employees of the companies that share similar characteristics and have the same nationality.

Hypothesis 3:

The Rhineland corporate governance system is negatively related with the internationalization of the corporate boards.

3.5 The Japanese Corporate governance system

The Japanese Corporate governance system has more similarities with the Rhineland rather than the Anglo-Saxon. According to Hoshi (2007) the Japanese corporate governance system has a “control-oriented nature of shareholding” which means that companies in this system are fulfilling their financial needs mostly through banks and the number of the shareholders is limited. Another characteristic of this system is that workers do not have a formal representation in the board of directors, however they are able to influence the decision-making process of the managers. The boards have a quite complex structure; there are three different bodies – a board of directors, an office of representative and an office of auditors (Weimer & Pape, 1999). Finally, another characteristic of this system is that the governments are able to intervene in the management of the companies as they can place retired government officials in the boards. In that way, the governments are able to control and have access to important information in private companies.

Weimer and Pape (1999) state that the main characteristic of the Japanese system is the influence of the Japanese culture on the way that companies are governed. The Japanese culture places high importance in the family values and especially in the older people. These

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values are incorporated in the business world as well. People in these countries usually work at the same company for their whole lifetime. In that way workers and company develop a long-term relationship characterized by a “ranking hierarchy”(Aoki, 1988). In order to elaborate further on this term, a “ranking hierarchy” means that as workers progress in their work, they move to higher positions with bigger responsibilities and greater influence in the management. The boards in most of the cases are made up by internal members of the company or by retired governmental officials. The above elaboration leaves us with some conclusions in relation to our topic.

We can argue that the internationalization process of the firms under the Japanese corporate governance system is a challenging procedure. Companies under this system follow a very conservative structure and evolvement, something that provokes important difficulties in the internationalization of the firms. More specifically, the structure of the boards limits the openness to foreign investors. Foreign directors and especially non-nationals cannot enter the boards easily something that affects the decision-making process in regards to internationalization matters.

Hypothesis 4: The Japanese corporate governance system is negatively related with the

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4. METHODS

4.1 Sample and data collection

This study uses a cross-sectional research design to examine the effect of board of directors’ nationality diversity on the percentage of foreign sales out of the total turnover. In addition, the study examines the effect of three different locations where companies are based. Control variables have been used in the analysis which includes the firm performance, the size of the company, the industry and the age of the company. The sample is based on the Global Fortune 500 companies as listed in 2012. Furthermore, the companies within this sample belong to all sorts of industries. The sample has been divided into three sectors, the primary (industries engaged in production or extraction of natural resources such as crops, oil, etc.), secondary (industries of light and heavy manufacturers of finished goods) and the third sector, which includes the services.

The firms are situated in 38 different countries. Most originate from the United States (26,6%) followed by China (16,8%), Japan (12,4%), France (6,2%), Germany (5,8%) and the United Kingdom (5,2%) (Table 1, Appendix).

4.2 Measures

4.2.1 Dependent variable

In this research four different regression models have been built. In these models two different dependent variables have been used. The first dependent variable has been used only in the first hypothesis and the second one in hypotheses 2, 3 and 4. Thus, the dependent variables in this thesis are the percentage of foreign sales out of the total turnover (used in hypothesis 1) and the percentage of foreign members out of the total members in the board of directors. Both variables have a range of 0%-100%. So, there was not any need to transform

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them. Each one of these two variables is a ratio, the first one is the ratio of foreign sales on the total turnover and the second one is the ratio of foreign members on the total members in the board of directors.

4.2.2 Independent variable

The independent variable used in this thesis for the first hypothesis was the percentage of foreign members out of the total members in the board of directors. The data collected for each corporation for the year 2012 includes relevant board variables, such as the nationality of the CEO and directors, gender, year of birth, and tenure. The operational definition that has been used in order to decide which board member is foreigner or not was the following: a director is considered foreign when his or her citizenship is different from the country of origin of the firm. In hypotheses 2, 3 and 4 the independent variable each time was the location of the firm, which means where the home country of the company was. Thus, to test hypothesis 2 we ran a model where the independent variable was a dichotomous variable that scored 1 when the corresponding company was in the Anglo Saxon system and 0 otherwise. (i.e., if the home country of the company is located in USA, Canada, UK or Australia the variable takes the value of 1, if not it takes the value of 0). In the same way for hypothesis 3 there was the Rhineland system (if the home country of the company was in Germany, the Netherlands, Austria, Finland or Denmark it takes 1, otherwise 0) and for hypothesis 4 was the Japanese system (1 if the home country is in Japan, otherwise 0).

4.2.3 Control variables

Firm size is the first variable that is controlled for. This is a common control variable and it could be linked to firms that do not only have domestic orientation. To determine the size of a firm the total number of employees is used. The age of a firm, measured as years after incorporation, is included as a second control variable since it could probably affect the

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firm’s orientation. The third control variable is the sector of company (primary, secondary, services). Two dummy variables have been constructed for this purpose, the first one represents the primary sector and the second one the secondary sector. The sector of a firm may have an important role in the orientation, if it has international sales or not. The fourth control variable is the ROA before tax for the year 2012. These four variables have been used as control variables for all the hypotheses. But in hypotheses 2, 3 and 4 there is one more, the firm internationalization, which is measured by the percentage of foreign sales out of the total turnover.

4.3 Statistical analysis and results

The descriptive statistics of the dependent, independent, and control variables used are presented in following tables.

Table 2. Descriptive Statistics

N Minimum Maximum Mean Std. Deviation The percentage of foreign sales out

of the total turnover 356 ,00 1,00 ,4570 ,30538

The percentage of foreign members out of the total members in the board of directors

435 ,00 1,00 ,1571 ,20532

ROA %(Using P/L before tax) 468 -20,250 44,722 5,19285 6,749452 Size (Number of employees) 499 189 2200000 120219,58 152197,973

Age of the company 495 4,00 350,00 64,2424 51,53665

According to table 2 the average value, the standard deviation, the minimum and maximum value of the variables can be seen.

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Table 3. Primary sector

Frequency Percent Valid Percent

Cumulative Percent

Valid No 434 88,2 88,2 88,2

Yes 58 11,8 11,8 100,0

Total 492 100,0 100,0

According to table 3 11.8% of the total number of firms belongs to the primary sector.

Table 4. Secondary sector

Frequency Percent Valid Percent

Cumulative Percent

Valid No 303 61,6 61,6 61,6

Yes 189 38,4 38,4 100,0

Total 492 100,0 100,0

According to table 4 38.4% of the total number of firms belongs to the secondary sector.

Table 5. Firm’s location

No Yes N % N % Anglo Saxon sytem 32 4 64, 8% 17 6 35, 2% Rhineland system 45 9 91, 8% 41 8,2 % Japan system 43 8 87, 6% 62 12, 4%

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Table 6. Correlation matrix The percentage of foreign sales out of the total turnover The percentage of foreign members out of the total members in the board of directors ROA %(Using P/L before tax) Size (Number of employees) Age of the company The percentage of foreign sales out of

the total turnover 1 ,471** ,097 ,084 ,160**

The percentage of foreign members out of the total members in the board of

directors ,471

** ₁ _,072 _,021 _,097*

ROA %(Using P/L before tax) _,097 _,072 ₁ _,054 _-,076

Size (Number of employees) _,084 _,021 _,054 ₁ _-,004

Age of the company _,160** _,097* _-,076 _-,004 ₁

According to table 6 there is a statistical significant positive correlation of low intense between the percentage of foreign sales out of the total turnover and the percentage of foreign members out of the total members in the board of directors (r=. 471, p<. 01).

For the first hypothesis a hierarchical linear multiple regression model was constructed. In the first step all the control variables were entered and in the second step the

percentage of foreign members out of the total members in the board of directors was entered.

As far as the hypotheses of the regression model the Durbin Watson index in the second model was equal to 1.902, which means that there is not any autocorrelation problem (acceptable values 1-3). Also, all the VIF’s values (range 1.005-1.177) are less than 10, which mean that there is not any multicollinearity problem (Field, 2005). In addition there is any normality problem (graphs 1 and 2, Appendix) or any serious heteroscedasticity problem (graph 3, Appendix).

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Table 7 Predicting the percentage of foreign sales out of the total turnover using as control variables the ROA%, size of the company, age of the company, sector of the company and as independent variable the percentage of foreign members out of the total members in the board of directors.

Table.7 Model Stan dardized Coefficients t Sig. Beta 1 (Constant) 8,434 ,000

ROA %(Using P/L before tax) ,053 ,968 ,334

Size (Number of employees) ,090 1,689 ,092

Age of the company ,122 2,278 ,023

Primary sector ,037 ,650 ,516

Secondary sector ,324 5,754 ,000

2 (Constant) 6,018 ,000

ROA %(Using P/L before tax) ,046 ,965 ,335

Size (Number of employees) ,081 1,753 ,081

Age of the company ,101 2,173 ,031

Primary sector ,054 1,085 ,279

Secondary sector ,318 6,488 ,000

The percentage of foreign members out

of the total members in the board of directors ,464 10,074 ,000

Hierarchical standard multiple regression was used to assess the ability of the percentage of foreign members out of the total members in the board of directors and ROA%, size of the company, age of the company, sector of the company (these four variables have been used as control variables) to predict the percentage of foreign sales out of the total turnover. In the first step the model was statistical significant (F(5, 311)=9.504, p<.001, R square=13.3%). The same was true for the second model (F(6, 310)=27.391, p<.001, R

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means that the model improved by entering the independent variable. In the second model it can be seen that the age of the company (Beta= .101, p=.031), the secondary sector (Beta=.318, p<.001) and the percentage of foreign members out of the total members in the board of directors (Beta=.464, p<.001) were statistical significant. The percentage of foreign members out of the total members in the board of directors had the greatest positive effect to the percentage of foreign sales out of the total turnover.

For the second hypothesis a hierarchical linear multiple regression model was constructed. In the first step all the control variables were entered and in the second step

Anglo-Saxon system variable was entered.

As far as the hypotheses of the regression model the Durbin Watson index in the second model was equal to 1.863 which means that there was not any autocorrelation problem (acceptable values 1-3). Also, all the VIF’s values (range 1.021-1.265) were less than 10, which mean that there is not any multicollinearity problem (Andy Field, 2005). In addition there was not any normality problem (graphs 4 and 5, Appendix) or any serious heteroscedasticity problem (graph 6, Appendix).

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Table 8 Predicting the percentage of foreign members out of the total members in the board of directors using as control variables the ROA%, size of the company, age of the company, sector of the company, the percentage of foreign sales out of the total turnover and as independent variable the Anglo-Saxon system.

Table 8. Model Standardized Coefficients t Sig. Beta 1 (Constant) 1,754 ,080

ROA %(Using P/L before tax) -,013 -,254 ,799

Size (Number of employees) -,029 -,582 ,561

Age of the company -,020 -,401 ,689

Primary sector -,056 -1,051 ,294

Secondary sector -,159 -2,875 ,004

The percentage of foreign sales

out of the total turnover ,532 10,074 ,000

2 (Constant) 1,099 ,273

Primary sector -,039 -,713 ,476

Anglo Saxon sytem ,074 1,408 ,160

Hierarchical standard multiple regression was used to assess the ability of the Anglo-Saxon system and ROA%, size of the company, age of the company, sector of the company, firm’s internalization (these five variables have been used as control variables) to predict the percentage of foreign members out of the total members in the board of directors. In the first

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step the model was statistical significant (F(6, 310)=17.245, p<.001, R square=25.0%). The same was true for the second model (F(7, 309)=15.111, p<.001, R square=25.5%).

The R square change was equal to .005 (F(1, 309)=1.981, p=.160) which means that the model did no improve by entering the independent variable. In the second model it can be seen that the secondary sector (Beta=-.152, p<.01) and the percentage of foreign sales out of the total turnover (Beta=.545, p<.001) were statistical significant. The Anglo-Saxon system was not statistical significant.

For the third hypothesis a hierarchical linear multiple regression model was constructed. In the first step all the control variables were entered and in the second step

Rhineland system variable was entered.

As far as the hypotheses of the regression model the Durbin Watson index in the second model was equal to 1.873, which means that there was not any autocorrelation problem (acceptable values 1-3). Also, all the VIF’s values (range 1.041-1.258) were less than 10, which means that there is not any multicollinearity problem (Andy Field, 2005). In addition there was not any normality problem (graphs 7 and 8, Appendix) or any serious heteroscedasticity problem (graph 9, Appendix).

Table 9 Predicting the percentage of foreign members out of the total members in the board of directors using as control variables the ROA%, size of the company, age of the company, sector of the company, the percentage of foreign sales out of the total turnover and as independent variable the Rhineland system

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Table 9. Model Standardized Coefficients t Sig. Beta 1 (Constant) 1,754 ,080

Primary sector -,056 -1,051 ,294

The percentage of foreign

sales out of the total turnover ,532 10,074 ,000

2 (Constant) 1,761 ,079

ROA %(Using P/L before tax)

-,015 -,298 ,766

Size (Number of employees)

-,029 -,581 ,562

Age of the company _-,019 _-,376 _,707

Primary sector _-,054 _-1,014 _,311

Secondary sector _-,159 _-2,884 _,004

The percentage of foreign

sales out of the total turnover _,538 _9,995 _,000

Rhineland system _-,029 _-,569 _,570

Hierarchical standard multiple regression was used to assess the ability of the Rhineland system and ROA%, size of the company, age of the company, sector of the company, firm’s internalization (these five variables have been used as control variables) to predict the percentage of foreign members out of the total members in the board of directors. In the first step the model was statistical significant (F(6, 310)=17.245, p<.001, R

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square=25.0%). The same was true for the second model (F(7, 309)=14.796, p<.001, R square=25.1%).

The R square change was equal to .001 (F(1, 309)=.324, p=.570) which means that the model did no improve by entering the independent variable. In the second model it can be seen that the secondary sector (Beta=-.159, p<.01) and the percentage of foreign sales out of the total turnover (Beta=.538, p<.001) were statistical significant. The Rhineland system was not statistical significant.

For the fourth hypothesis a hierarchical linear multiple regression model was constructed. In the first step all the control variables were entered and in the second step Japanese system variable was entered.

As far as the hypotheses of the regression model the Durbin Watson index in the second model was equal to 1.868, which means that there was not any autocorrelation problem (acceptable values 1-3). Also, all the VIF’s values (range 1.040-1.332) were less than 10, which means that there is not any multicollinearity problem (Andy Field, 2005). In addition there was not any normality problem (graphs 10 and 11, Appendix) or any serious heteroscedasticity problem (graph 12, Appendix).

Table 10 Predicting the percentage of foreign members out of the total members in the board of directors using as control variables the ROA%, size of the company, age of the company, sector of the company, the percentage of foreign sales out of the total turnover and as independent variable the Japanese system

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Table10. Model Standardized Coefficients t Sig. Beta 1 (Constant) 1,754 ,080

Age of the company _-,020 _-,401 _,689

Primary sector _-,056 _-1,051 _,294

Secondary sector _-,159 _-2,875 _,004

2 (Constant) 2,424 ,016

Primary sector -,053 -,997 ,320

Japan system -,130 -2,524 ,012

Hierarchical standard multiple regression was used to assess the ability of the Japanese system and ROA%, size of the company, age of the company, sector of the company, firm’s internalization (these five variables have been used as control variables) to predict the percentage of foreign members out of the total members in the board of directors. In the first step the model was statistical significant (F(6, 310)=17.245, p<.001, R square=25.0%). The same was true for the second model (F(7, 309)=15.948, p<.001, R square=26.5%).

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that the secondary sector (Beta=-.125, p<.05) and the percentage of foreign sales out of the total turnover (Beta=.503, p<.001) were statistical significant. The Japanese system was also statistical significant (Beta=-.30, p<.05)

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5. DISCUSSION

The findings of this research indicate that the national diversity in the Board of Directors has an influential role in the internationalization strategies of the firms. More specifically, we found a positive association between the national diversity in the board of directors and the strategic decision-making in internationalization matters. This study examined the role of the different corporate governance systems on the national diversity in the board of directors and we found that the Japanese corporate governance system is negatively related with the internationalization of the corporate boards. This research failed to find associations between the Ango-Saxon and the Rhineland system in the internationalization of the corporate boards. It can be concluded from the analysis of the previous chapter that two of the four research hypotheses were confirmed. In the following sections we will discuss the academic relevance, the managerial implications, limitations and suggestions for future research.

5.1 Academic Relevance

This research provides findings in the existing literature by examining the relationship between the national diversity in the board of directors and the distribution of international equity affiliates and by shedding light on the role of the different corporate governance systems in the globalization of the boardrooms. The results suggest that the national diversity in the board of directors facilitate the internationalization of the firms. More specifically, members in the boards with different backgrounds, ethnicities, experiences and knowledge provide useful recourses in the advisory and service role of the boards. The study demonstrates that national diversity is a very important element in the strategic decision-making process of the boards that leads to higher levels of internationalization of the firms. These findings confirm the ability of the upper echelons and resource dependence theory to explain the strategic relationship between the board of directors and firm internationalization.

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Non-national directors with their unique resources, knowledge and experience can influence the levels of the internationalization of the firms.

Previous studies indicate that the liability of foreignness is one of the most important complexities that firms have to face when they expand their strategies internationally. In order for the multinational companies to overcome these complexities, they are trying to add more foreign members in the boards (Oxelheim et al., 2013). The findings of our research support these outcomes and provide further validity by examining a quite diverse sample of companies. To be more specific, our sample is based on the Global Fortune 500 and the companies within this sample belong to different industries and countries. Oxelheim et al. (2013) found a positive association between the national diversity of the board of directors and the multinationality of the firms by explicitly examining companies from the Nordic countries. Staples (2007) also found a positive association by investigating a small sample of 80 companies. Our research of investigating the Global Fortune 500 companies enabled us to provide further support on the conclusions of Oxelheim et al. (2013) and Staples (2007).

Our study examines the interrelationship between three dominant corporate governance systems and the national diversity in the board of directors. Although we examined the Anglo-Saxon, Rhineland and the Japanese system, only the latter was associated with the national diversity in the boards. We found that the Japanese corporate governance system is negatively related to the internationalization of the corporate boards. Previous studies argue that the Japanese firms are characterized by a more “control oriented nature of shareholding” (Hoshi, 2007) that limits the openness to foreign investors. The majority of the members in the board of directors in these firms are national members that have developed long-term relationships with the companies. As we expected this more conservative structure of the Japanese firms affects the internationalization of the corporate boards negatively.

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Our study examines the Anglo-Saxon and Rhineland corporate governance system but fails to find any significant association with the national diversity in the corporate boards. This suggests that national diversity in the boards of directors is not affected by the Anglo-Saxon and Rhineland system.

5.2 Managerial implications

This research provides important managerial implications. Firstly, companies with a global focus that want to achieve higher levels of internationalization need to pay special attention to the national diversity within their board of directors. These firms need to appoint foreign directors in the boards since this positively affects the distribution of international equity affiliates outside the home country. The firms with globalized boards can overcome the liability of foreignness and achieve more efficient expansion abroad.

Secondly, firms relying on the Japanese corporate governance system that have a global focus, need to be aware that this more conservative system does not facilitate the internationalization of the corporate boards. As our findings suggest, national diversity in the boards is an important factor for higher levels of internationalization. Firms relying on the Japanese corporate governance system should start including foreign members in the boards so that they can achieve higher levels of internationalization.

5.3 Limitations and suggestions for future research

Limitations of this research should also be acknowledged. The national diversity of the board of directors is determined by the place of birth of each member. However, it is possible that people who have been born in a country may have grown up in different one. In some cases, people are born in families where the parents come from different nationalities. Therefore, all these different cases and situations can influence the validity of the national diversity to predict levels of multinationality.

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Moreover, it should be acknowledged that the members of the boards of directors usually come from elites with common characteristics. Even if some members in the boards come from different countries but have the same working and educational experiences with the rest of the members, then they don’t really provide unique resources to the boards. Therefore, future research can expand this study and investigate the same research question further by analyzing the backgrounds and experiences of the members.