Changing with the times?

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University of Newcastle upon Tyne and Rijksuniversiteit Groningen

Changing with the times?

An investigation of the nationalities of

international board members serving on UK

boards between 2000 - 2010

Martin McDonagh

Advanced International Business and Management (Dual Award)

Student Number: 110491260 (Newcastle); 2259761 (Groningen)

Supervisors: Dr Tracy Scurry (Newcastle); Dr Kees van Veen (Groningen)

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Abstract

The nationalities of a sample of international board members, from the boards of 48 UK companies, which were listed on continuously the FTSE100 between 2000 and 2010, have been investigated in this study. The objective was to identify whether the nationalities represented on UK boards have undergone any significant changes during a period which witnessed increased globalisation and substantial European integration. It argues that overall the number of nationalities represented on UK boards will increase during the period 2000 to 2010 and the proportion of the nationalities represented on UK boards will be determined by the changing strength of formal and informal ties between the UK and the international board member’s country of origin. Applying arguments around the importance of formal and informal ties between countries in determining economic exchanges it argues that historic relationship (conceptualised as whether the country of origin of an international board member was a former colony) will be an important feature in determining the nationality of the international board members however the impact of the historic relationship between countries will diminish as globalisation progresses.

The study identifies that the nationalities of board members represented on the UK companies included in the study do not undergo any significant changes during this time period. The overall number of nationalities represented does not significantly change and despite the forces of globalisation the proportion of international board members from countries with historic relationship with the UK increases rather than decreases during the period. A historic connection between the UK and a board members country of origin continue to be an important determinant of international board members nationalities. Despite continued European integration no significant increase in board members originating from countries within the European Union was identified.

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Acknowledgements

I would like to take this opportunity to thank all the people who have supported me during my studies and assisted me in the preparation of this dissertation.

I would especially like to thank my dissertation supervisors Dr. Tracy Scurry of the University of Newcastle upon Tyne and Dr. Kees van Veen of the Rijksuniversiteit Groningen for their generous and kind support. I am grateful to them for the help, guidance and advice they have provided to me. Their contributions have been thoughtful and insightful.

In addition I would like to thank my family and friends for their constant encouragement. All errors and failings are my own.

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Introduction

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and Ruigrok, 2009). The academic studies have sought to explain the antecedents of the increased international diversity of boards and offered avenues for further research. The reasons for increased international diversity have often been attributed to the diversification of the workforce, the rise of diversity management and the on-going internationalisation of the business environment (van Veen and Marsman, 2008). Moreover, companies are increasingly competing in an international environment and require international experience at the higher levels of the organisation to access the resources (Pearce and Zahra, 1992; Nielsen and Nielsen, 2010).

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within a multi-national context (Barak, 2010). According to the European Union international diversity on boards can assist in removing ‘group think’ and it has explored the possibility of introducing quota systems for ensuring sufficient international diversity exists (EU, 2011).

This study is a response to the increased interest in international diversity and the focus regulators are placing upon international diversity on boards and it addresses the underrepresentation of studies on the specific nationalities represented on boards. It considers the nationalities of international board members on the boards of UK companies. It involves a longitudinal study of FTSE100 companies from 2000-2010 to identify the trends associated with the growing diversity of nationalities of members of UK boards. The setting for the research is the UK as it has been found that in Europe the international diversity of boards has increased significantly (Heijltjes, Olie and Glunk, 2003; Heemskerk, 2007; Staples, 2007; Heemskerk and Schnyder, 2008) and has led Carroll (2009) to comment on a prodigious growth of European trans-nationalists. In addition UK boards have a higher degree of international diversity than other boards within Europe. The figures published by Heidrick and Struggles (2011) indicate that UK has 40% average national diversity on its boards with only the Netherlands at 47% and Switzerland at 53% having more national diversity. The figures would indicate that within the UK globalisation has contributed to development of a ‘transnational business class’ (Sklair, 2001).

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many of these historic ties by creating new political and social ties. In many ways this can be classified as ‘ties that bind’ or ‘changing with the times’. The ‘ties that bind’ can be understood in terms of historic ties between the UK and the country of origin of the international board members while ‘changing with the times’ can be understood as companies responding to new political and social ties generated by increased globalisation and European integration.

The main research question is to determine the nationalities of international board members serving on UK boards between 2000 and 2010 to identify whether the nationalities represented on UK boards during this period reflect increased globalisation and European integration. A series of hypotheses are developed based upon the theory that globalisation has affected the strength historic, political and social formal and informal ties. It is proposed the strength of historic ties between the UK and the country of origin of international board member in determining the nationalities represented on UK boards should decline in importance as new political and social ties are formed. The proportion of nationalities represented on UK boards from countries with historic ties to the UK during the period under investigation should decrease while political and social ties associated with European integration should lead to an increase in the proportion of international board members from the European Union.

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Theoretical Foundations

Within this section the structure, purpose and responsibilities of boards is evaluated. The appointment process is examined to identify the mechanisms which facilitate and impede diversity. The existing state of diversity and in particular international diversity on boards is considered. The theories available to describe the nationalities of international board members are detailed and critically appraised. The impact of formal and informal ties in economic exchanges is examined and applied to the human capital exchanges associated with the movement of international board members across national boundaries. In addition, the literature surrounding the growth of globalisation and the development of a transnational business class is considered and the impact it has on formal and informal ties. A series of hypotheses are presented which describe our expectations regarding the nationalities represented on the boards of companies within our sample over the period 2000 to 2010.

Defining the role and importance of the ‘Board of Directors’ in the UK

The UK corporate governance framework states that every company should have a board which assumes collective responsibility for the long term success of the company (Financial Reporting Council, 2010). The board of directors provides leadership for a company, assuming responsibility for founding and maintaining the company’s values, mission and vision and is accountable to shareholders and stakeholders for its actions (Institute of Directors, 2009). The UK operates a unitary board structure, which is divided into executive and non-executive directors. The executive directors assume operational responsibility where non-executive directors do not have any operational responsibility and have more of an oversight role.

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Wright (1993) identify that the importance of the board of directors exists in the supervision and protection roles that it performs. Furthermore, Bainbridge (2003) applies the concept of agency theory to suggest that the board has an important function in monitoring the actions of management and exercising a fiduciary duty thus the board ensures that the self-interest of management is curtailed. Under resource dependency theory the company needs to be linked to the external environment and the board offers an opportunity to access the external environment. Nicholson and Newton (2010) state that the board perceives its role to involve coordinating a response to risk and ensuring compliance with regulation, formulating strategy, ensuring appropriate governance, developing the CEO and senior management and managing stakeholders. Overall, the board performs numerous functions: legitimising, directing and overseeing. It ensures that the company is compliant with legal requirements; it develops the corporate strategy and oversees the management of the organisation.

Board-Level Diversity

Diversity on boards is usually conceptualised as the composition of the board and the attributes of individual board members (Brammer, Millington and Pavelin, 2007). Kang, Chang and Gray (2007) distinguish between two distinct types of diversity, which they term observable diversity and less visible diversity. The observable diversity is concerned with gender, age, race and ethnicity, while the less visible diversity is associated with board members’ educational and functional backgrounds. For many years boards were considered to be bastions of homogeneity and displayed a distinct lack of diversity. For the most of the twentieth century there was limited diversity on corporate boards. It was re-enforced by the restricted mobility of directors which tended to be drawn from the same professional and business class (Meisel, 1958; Useem 1984; Kay 1992). In many respects the corporate boards of UK companies were homogenous with director’s experiencing common schooling and higher education (Jeremy, 1984).

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the Higgs Review on the role and effectiveness of non-executive directors, which found that deficiencies in the appointment process negatively impacted diversity on boards. The Higgs Review was followed by the Tyson Report in 2003, which recommended changing the appointment process to increase the level of diversity. The importance of having a diverse board identified by these government sponsored reviews has been incorporated into the corporate governance code for the UK. The corporate governance code for the UK incorporates diversity with Principle B.2 Appointments to the Board where the supporting principle states:

‘The search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender’ (FRC, 2010, p.12)

Prior to and following on from the recommendations made by the corporate governance code a significant number of studies have been performed on board-level diversity, focusing upon gender and ethnicity (Singh, 2007). It has been identified that significant benefits can result from board level diversity, with studies finding that diversity has a positive impact upon corporate governance and financial performance indicators (Erhardt, Werbel, and Shrader, 2003; Boone and Hendricks, 2009). However, Carter, D’Souza, Simkins and Simpson (2010) do not find any relationship between diversity and performance when confined to ethnic and gender diversity.

International Diversity on the Board

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A significant determinant of board level diversity is the orientation of the company and its founders. The orientation of the company can be classified as either ethnocentric, polycentric or geocentric (Perlmutter, 1969; Caligiuri and Stroh, 1995; Mayrhofer and Brewster, 2007). An ethnocentric company will be orientated towards its country of origin, a polycentric company will be orientated towards its host country and geocentric company will have a global outlook.

Estelyyiova and Nisar (2013) identify that director nationality is an important factor for the way in which shareholders’ interests are represented and protected, as nationality is a source of director competence and decision making ability. In addition, the nationality of a director can affect other competences associated with director performance including a commitment to results, strategic planning and global awareness (Sosik, Gentry and Chun, 2011). Despite these findings Heijltjes, Olie and Glunk (2003) have identified the extent of international diversity on boards of directors and top management teams has not increased at the same pace as the internationalisation of companies. The lack of international diversity on boards is attributed to the following arguments: 1) International directors lack sufficient cognitive abilities to be effective on the board of directors and lack the knowledge and skills required to provide appropriate challenge and oversight, 2) International director do not have sufficient level of social capital which prevents them from accessing the social networks which enable a board appointment, 3) International director are not compatible with the boardroom culture and will not be able to make a positive contribution and 4) The appointment process is often ad hoc and lacks sufficient transparency thus it becomes biased against international board members (Heijltjes, Olie and Glunk, 2003).

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nomination committee positively affects the overall diversity of the board of directors. The findings support earlier findings by Bilimoria and Piderit (1994) that found that increased diversity on committees contributed to increased diversity on the board.

International Appointments to the Board

The nomination committee recommends the appointment of board members to ensure that the board it able to carry out its statutory functions. Kaczmarek, Kimino and Pye (2012) propose three distinct ways in which the nomination committee operates based upon the similarity – attraction paradigm, homo-social production and social identification. The similarity – attraction paradigm is premised upon the notion that people with similar backgrounds will be attracted towards each other because interaction will be easier and a relationship will be more likely to develop. In the context of boards it acts as a barrier to diversity as it encourages the appointment of directors with a similar background. Likewise, according to homo-social production an archetypal board director is identified which is constantly re-enforced through subsequent appointments (Kanter, 1993; Stafsudd, 2006). Social identity theory, as articulated by Kaczamarek, Kimino and Pye (2012), explains the tendency for appointments to not sufficiently increase diversity on the board. The board develops a social consciousness and views subsequent appointments in terms of a set of self-developed norms and regulations which prevent the growth of diversity.

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commercial and capital links (Scott, 2003). Estelyyiova and Nisar (2012) state that board members are recruited for firm specific reasons. They identify heterogeneity among shareholders and the extent of operations as the main factors that prompt the recruitment of international board members.

The similarity-attraction paradigm, social identify theory and homo-social reproduction as identified above highlight together with networks indicate the importance of background in the appointment process. However, these theories are not completely supported in the literature as Nielsen and Nielsen (2011) identify that the background and experiences of foreign directors are not as important in the appointment of international board members as the premium placed foreign nationality. Foreign nationality is judged to be a determinant of competitiveness in a global market place. Thus, the increased presence of foreign nationals on boards is the product of the competitive environment rather than any long standing ties. When a company expands, consideration is given to the cultural, administrative, geographic and economic distance of the expansion or acquisition (Ghemawat, 2001). Oxelheim, Gregoric, Randoy and Thomsen (2013) identify that companies with high international sales tend to appointment more international directors suggesting that commercial internationalisation makes a significant contribution to board internationalisation.

The emergence of a ‘transnational business class’

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and the growth capitalist class controlling resources (Nollert, 2005). The growth of international diversity on the boards of transnational companies has been considered as evidence that transnational business class and networks associated with the transnational business class are beginning to emerge. The empirical evidence for the emergence of a ‘transnational business classes had for some time been lacking however increasingly it is apparent that a transnational business class is emerging and it is based upon nation state (Nollert, 2005). Burris and Staples (2013) find evidence of a transnational business class, which they describe as circumscribed, which has made strides in transcending national boundaries between North America and Europe.

The role of Formal and Informal Ties between Countries in Economic Exchanges

Makino and Tsang (2011) note the importance of specific ties between countries in determining economic exchanges and identify two distinct type of ties; formal and informal ties. The formal ties are defined as the geo-political agreements and treaties that bind countries while the informal ties are centred the historical and cultural ties that bind countries together. The UK has formal ties with a number of countries through the European Union (EU), Organisation for Economic Co-operation and Development (OECD) and the Commonwealth likewise it has ties with numerous nations through supranational agreements through the United Nations. The informal ties are considered to develop naturally due geographic proximity, immigration and colonisation (Makino and Tsang, 2011). The presence of historical ties facilitates interaction between countries. In the context of board level diversity the formal and informal ties allow for a framework in which diversity can operate and contribute to representation of specific nationalities on the board.

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integration of the EU has resulted in the increased national diversity on the boards of EU companies however as they point out the relationship was not strong and may be continuing to develop as labour market structure generated by these formal ties is continuing to develop and continuing importance of historic relationships in understanding board members nationality.

Historic Formal and Informal Ties

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exchange: the incentive structures include reduced uncertainty and risk, increased legitimacy and a removal of psychological barriers (Makino and Tsang, 2011).

Historic relationships in board-level appointments

Although the arguments used by Makino and Tsang (2011) are centred on economic exchanges we can apply them to human capital exchanges associated with the appointment of international board members. The historic relationship founded upon colonialism has always been an important factor in influencing the international composition of board members. Brayshay, Cleary and Selwood (2005) have identified that many of the linkages common to networks of directors were prevalent during the British Empire, 1900-1930, identifying that although transnational corporations as defined by moderns standards were rare, when they did exist were run by a corporate elite which shared a common belief system. Indeed, many political, social and cultural ties were developed during the era of European expansion and colonialism. Interestingly, as Jeremy (1984) identified international experience was always highly valued during the period and experience of working in a colony was attractive to boards seeking to diversify operations.

Decolonisation and Post-Colonial Relationships

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have become autonomous and attempted to develop into modern nation states with associated symbols and institutions, many states were counterfeits lacking in authenticity or legitimacy. The post-colonial relationships between the UK and its former colonies have produced as myriad of network ties which made it easier for international board members from former colonies to access boards in the UK. The pre-existing ties also assist in the development of business and social networks which link the countries, which we have already identified as being important in the appointment process. The importance of business and social networks in identifying board members has been established. Often these business and social networks contribute to the number of international board members serving on UK boards. The post-colonial experience has also produced significant post-colonial immigration. It is widely established that immigration of highly skilled individual is often an economic imperative however social and cultural issues are also apparent in this movement. The high levels of immigration from post-colonial states increase the level of diversity in the workforce and contribute to the development of the social and business networks.

The continued economic and cultural bonds between the UK and its former colonies are witnessed in the Commonwealth. The Commonwealth is an inter-governmental organisation, which comprises of 54 states. McIntyre (2008) describes the Commonwealth as an association of peoples as well as states. The membership of the commonwealth is determined by criteria set out in the Kampala communiqué that states members should have a historical connection to attachment to another commonwealth country (CHOGM, 2007). Apart from Rwanda and Mozambique all members of the commonwealth were colonies of the UK. The commonwealth originated in 1949, when the former dominions or self-governing territories of the British Empire, came together to form a group. It was supplemented by the Asian, African and Caribbean countries which progressively obtained independence from the United Kingdom during the rapid period of decolonisation post-war. However a number of former colonial territories are not members of the commonwealth including the United States of America and Ireland despite sharing a colonial connection with the UK.

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commonwealth states, with significant investment in Canada, Australia and South Africa. In addition, manufacturing multi-nationals provided the largest source of foreign direct investment in Singapore (Lundan and Jones, 2001). The presence of UK companies in was also evident in Africa and Asia where UK companies were embedded in in the political and business systems. Building upon the work of Lundan and Jones (2001), Bennett and Sriskandarajah (2011) found even though the commonwealth has lost some of the political links that sustained it after independence, trade is more likely between members of the Commonwealth. Dow and Karunaratna (2006) when studying the intensity of trade between countries found that the existence of a colonial relationship increased the intensity of trade however warned that colonial relationship may be a proxy for common language.

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immature, which suggests that for some former colonies it may not be of a required standard to enable board members to transfer to the UK.

Another linkage from the colonial period is education, Annisette (2000) has considered the accountancy profession in Trinidad and Tobago and identifies that British educational and professional institutions continued to dominate the education of professionals during the post-colonial period especially in the field of accountancy. The linkages were founded during the colonial period and endured through the decolonisation period. The majority of the accountants in Trinidad and Tobago hold a British type professional qualification. Likewise, the primary and secondary education in many colonial possessions was imported from Britain (Kumar, 1988). The educational systems and standards used by former colonial possessions make the appointments of international board members from these countries more attractive.

Globalisation and neo-colonialism

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The forces of globalisation have had a significant impact of some of the pre-existing ties between countries. The relationship between the UK and its former colonial possessions was significantly affected by the UK’s entry into European Community during the 1970’s (McIntyre, 1993). It involved a re-focusing of the UK economy towards Europe however it has been identified that ties between the UK and its former colonial possessions embodied in the Commonwealth remained strong (McIntyre, 1993; Lundan and Jones, 2001; Brysk, Parsons, and Sandholtz, 2002) Scholte (2000) has commented upon the accelerated rise of supra-territoriality since the 1960’s which has produced a major reconfiguration of the social geography which has damaged the pre-existing relationship between countries. Amsden (2007) argues that decolonization entailed economic as well as political independence. The discontinuities allowed colonies to pursue economically independent policies and develop a business class to replace the business class which often departed when the colonial power treated. However, it is noted that in former colonies in Africa this business class was not immediately replaced and took a number of years to sufficiently develop.

Impact on the board of directors between 2000 and 2010

Having surveyed the literature available on the international diversity of boards and board members and the effect of formal and informal ties between countries on the appointment process we need to examine the potential impact upon the nationalities represented on UK boards during the period 2000 to 2010. The period 2000 to 2010 is significant because it coincides with significant globalisation and the growth and increased importance of supranational organisations.

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companies expanding into former colonial markets as the colonial markets are often the most rapidly expanding. Jack and Westwood (2009) consider non-European directors to act as facilitators assisting in the transfers process after acquiring operations, assist with process of acculturation and hybridization. Additionally, many former colonial subjects have joined counterparts from the UK determined to become key players (Huntingdon, 1993). Thus, at the beginning of the twentieth century the corporate elite were drawn from the business and professional class, which was characterised by limited mobility and a high degree of cohesion. The cohesion was reinforced by common informative and educational experiences. This has not changed significantly with cohesion instead provided by a shared identify and common educational environment spread during the colonial era. Indeed, studying the curriculum adopted by UK business schools it is commented that individuals from former colonial territories may be more acculturated to UK business and business models (Witte, 2011)

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institutions will undermine the historic linkages. The process of globalisation progressively undermines many of the long standing associations. In the UK the forces of globalisation have increasingly been affecting the way in which companies in the UK conduct business and engage in cross boarder activities

Hypothesis 1a: Between 2000 and 2010 the proportion of international board members originating from countries with a deep historic colonial relationship will decrease.

As noted the colonial experience was not uniform and a distinction exists between settler and non-settler colonies. Settler colonies are the colonies where significant migration existed between the UK and the colony and non-Settler colonies where the level of migration was limited and the primary focus was on the control and extraction of resources from the colony. The links with settler colonies will be stronger with many inhabitants have a direct family link to the UK in the recent past. Non-settler colonies although sharing and maintaining many of the colonial era institutions and apparatus of corporate governance will not be attractive recruiting grounds. Many of the non-settler countries had suffered from long struggles for independence and took a long time to recover from these struggles. As Ogbechie et al (2009) have identified the institutions of non-settler colonies are immature in comparison to the UK and are unlikely to be attractive to UK companies. However, although the forces of globalisation will decrease the overall proportion of board members from countries with a historic tie the proportion from non-settler colonies will increase

Hypothesis 1b: Between 2000 and 2010 the proportion of international board members originating from non-settler colonies will increase.

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2000, with the introduction of the Euro thus as integration progressed the representation of board members from European Union countries will increase. Jamali, Safieddine and Daouk (2007) have commented that the top corporate elite should reflect changes in the workforce thus removal of labour restrictions should encourage the movement of top executives across international boundaries and lead to the growth of international board members from the European Union.

Hypothesis 2a: Between 2000 and 2010 the proportion of international board members originating from countries within the European Union will increase.

The European Union has undergone a process of enlargement between 2000 and 2010. At the beginning of the period due problems of with the legitimacy of ascension members institutions and corporate governance systems we expect international directors from the countries planning to join the European Union to be underrepresented on the boards of UK companies. However, as the countries planning to join to the European Union are admitted we expect board member from these countries to infiltrate UK boards. In 2000 the proportion of directors originating from the European will be dominated by members of the European Union admitted in the early phases of European Union however in the period 2000 to 2010 the representation of later ascension countries will increase.

Hypothesis 2b: Between 2000 and 2010 the proportion of international board members originating from post-200 EU ascension countries will increase.

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A shared legal structure between is suggestive of formal and informal linkages between countries. It is anticipated that companies within the UK will prefer board members from countries which operate a similar legal structure to the UK. It is expected that a higher proportion of international board members will originate from countries which have a common law basis rather than a customary law or civil law basis. Hotho (2009) identifies the importance of country-specific factors in determining international business activity, arguing that historical institutionalism can explain much of the international business activity between countries. When the institutional differences between countries are lower there is an increased propensity for the countries to engage in business activity. The recruitment of an international board member can be viewed as a business exchange therefore we anticipate that companies will prefer board members from countries where the institutional distance is minimal. In addition, Zainfal, Zulkfili, Saleh (2013) in a study of board composition in Malaysia have identified that in many developing countries an insider corporate governance system exists. The existence of such system would make it difficult for UK companies to recruitment board level executives from these countries because of the highly developed corporate governance system in the UK would be incompatible with such systems. Furthermore, the institutional differences would be required to be minimal to ensure that the appointment of international directors would have sufficient legitimacy ensuring a continuing preference for directors from countries which have a similar institutional background to the UK. Aguilera and Jackson (2003) note that many differences exist in the corporate governance regimes of advanced capitalist countries and have developed a model that describes the differences in governance considering the effect of the prevailing management ideology, labour representation and attitude towards capital. Hypothesis 4a: Between 2000 and 2010 the proportion of international board members originating from countries with a common law system will be higher those originating from countries with civil and mixed law systems.

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experience and knowledge to provide to fulfil their oversight responsibilities. Likewise, if an international director comes from a country with a particular low standard of corporate governance they are likely not able to command the require authority and respect of their counterparts.

Hypothesis 4b: Between 2000 and 2010 the proportion of international board members originating from countries where the institutional differences between that country and the UK are low will be higher than the proportion of international board members originating from countries where the institution differences between that country and the UK are high.

The role of economic and social development of the international board members country of origin will also be significant. Countries with a similar level of economic and social will be able to produce a higher calibre of candidates which are likely to be career minded and seek international appointments. The level of social and economic development of the international director will facilitate the movement of the international from the country of origin to the host country.

Hypothesis 5: The proportion of international board members originating from countries which are more economically and socially developed will be higher than the proportion of international board members originating countries which are less economically and socially developed. The measurement of economic and social development is the United Nations Human Development Index.

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Methodology

Within this section the sampling process, the variables constructed and the data analysis techniques are presented. The limitations of the methodology employed are also briefly outlined.

Sampling

Using the FTSE100 Index, which contains the leading UK companies by market capitalisation, we identify all company’s which have been listed on the exchange between 2000 and 2010. The listing was compiled from historic information, of companies forming the index between 2000 and 2010, which was obtained from DataStream. DataStream is an extensive database of historical company’s financial information containing financial indices for companies listed upon world stock exchanges. The information on the board members was obtained from a combination of annual reports published by the companies supplemented by using a variety of different resources including Duedil, which publishes information on directors provided to Companies House in the UK. Overall, we collected information on 100 companies and 2772 directors.

When the database had been completed all companies, which were not continuously listed on the FTSE 100 during the time period were removed, to ensure consistency, negate the impact of changing economic activity and to remove companies that list on the FTSE 100 but are not headquartered in the UK. The companies that retained a continuous listing throughout this period were significant companies which were stable. In total it produced a sample of 48 companies which were continuously listed on the index between 2000 and 2010 representing 530 directors.

Constructing the Variables

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House provided on Duedil supplemented by information with annual reports and information published on company websites. For some board members a boarder search of the internet was required using sites such as zoom info. In the rare incidences where information was unavailable, the Linked In and other social network profile of the board member was consulted.

The independent variables within this study are specific country characteristics associated with the board members country of origin including whether the country of origin of the international board member had a historic relationship with the UK, is a member of the European Union, the legal and institutional systems, the effectiveness of regulation, the human and economic development of the country and the geographic location. The country characteristics are obtained from a variety of sources as detailed below:

Historic Relationship

The existence of historic relationship between the UK and the country of origin of international board members is a key variable as we anticipate that historic ties will decline in importance over the period under investigation. As identified during the development of the hypotheses the historic relationship is conceptualised as whether the country of origin of the international board member was colony of the UK. Appendix 2 contains a map of all countries which were subject to colonisation by the UK. The information is sourced from the CEPII database which captures a number of inter-country comparisons (Mayer and Zignago, 2011) including the existence of a colonial relationship.

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we made a judgement based upon the control of the apparatus of government and distribution of power.

European Union Membership

The European Union was officially formed following the Maastricht Treaty in 1993 however its foundations are much earlier. In 1952 when the European Coal and Steel community was founded by Belgium, Luxembourg, Italy, the Netherlands and West Germany which became the European Economic Community (EEC) in 1957 after the Treaty of Rome. The EEC underwent enlargement in 1973 when the Denmark, Ireland and the United Kingdom joined it and further enlargement was witnessed in 1981 with the entry of Greece and in 1986 with the entry of Spain and Portugal. In 1995 after the Maastricht Treaty was signed Austria, Finland and Sweden were admitted to the European Union. The European Union was substantially enlarged in 2005 when Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Malta, Poland, Slovenia and Slovakia joined and in 2007 Bulgaria and Romania joined.

To determine whether a country is a member of the European Union and the date of entry we use the official listing of member states of European Union published on Europa.eu. The official listing of member states and date of entry can be found in Appendix 3.

Legal and Institutional Systems

The information on the legal system of a country is sourced from JuriGlobe’s alphabetical Index of the 192 United Nations Member States and Corresponding Legal Systems contained with Appendix 4. It classifies all the legal system of countries as either being common law system, civil law systems or mixed law. The mixed law system can be a combination of different law systems including customary and religious law.

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in the regulatory quality which is the perception of the ability of government to develop policies and procedures which contribute towards the growth and stability of private sector enterprises.

Language

The official language of the director’s country of origin is sourced from the CEPII database. The CEPII database provided the details of all official languages and whether a language is spoken by at least 20% of the population.

Economic and Social Development

To capture that economic and social development of the country of origin of the international board members we use the human development index developed by the United Nations. The human development index is a composite measure of three components measuring the access to health, education and incomes levels with countries. The human development index gives a human development score which is translated into a category to describe the level of development. The United Nations uses four categories: low, medium, high and very high.

Geographic Distribution

A number of variables exist to describe geographic distance associated with distance however for the purposes of this study we use the continent which the country of origin of the international director is located.

Data Analysis

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members of the European Union. The proportion of international board members from countries with a colonial relationship with the UK is further sub-divided to determine the proportion of board members from settler and non-settler colonies. Likewise, the proportion of international board members from the European Union is sub-divided by the date of entry.

The proportions for each variable are presented in a series of tables and graphs to analysis whether the nationalities of international board members have undergone the changes anticipated by the hypotheses.

Limitations to the methodology and data analysis

As the dependant variable in this study is the proportion of nationalities represented on UK boards between 2000 and 2010 it is not appropriate use a regression model based upon ordinary least squares. A regression model based on the fractional logit model is more appropriate however the use of this model requires a detailed understanding of econometrics and statistical techniques which we are unable to deploy within this study. Therefore, the proportion of international board members for each nationality represented on the boards of companies included in the sample will be calculated and presented in tabular and graphical form. The nationalities will be grouped by country specific characteristics to test the hypotheses made.

The use of this more simplistic data analysis technique is unfortunate as it prevents a thorough and detailed analysis of the explanatory power of the variables we have identified. Likewise, some of the variable we use for common language and legal systems are not completely satisfactory. The variables for common language and legal systems have been used in previous studies as proxies for a historic colonial relationship (Licht, Goldschmidt, and Schwartz, 2005). The geographic measure is compromise measure due to the failure to employ regression analysis.

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Findings

Within this section the findings of the investigation are presented.

Figure 1.1 displays the proportion of international directors represented on the boards of FTSE100 companies which have been consecutively listed on the FTSE 100 index over the period 2000 to 2010. The proportion of international directors in 2000 was 26% and increased to 32% in 2010. It displays that overall the international diversity of UK boards has increased over the time period. It is in keeping with previous academic and commercial studies on international diversity (Staples, 2007; van and Marsman, 2007).

Figure 1.1: Changes in the proportion of International Board Members Serving on UK Boards

The number of different nationalities represented on boards in the UK has remained fairly consistent as displayed in Figure 1.2. The number of different nationalities represented in 2000 was 20 before increasing to 22 in 2010 however in 2001, 2003 and 2004 it decreased to 19. 0% 10% 20% 30% 40% 50% 60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Changes in the proportion of International Board Members Serving on UK Boards

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Figure 1.2: Number of Different Nationalities on Represented on UK Boards 2000-2010

In Table 1 the specific nationalities of the international directors serving on UK boards are presented. During the period 2000-2010 a total of 28 nationalities were represented on the boards of companies which were continuously listed on the FTSE100 index. The United States provides the highest proportion of international board members across the period with a proportion consistently in excess of 30% of all international board members. It supports earlier studies that show that the United States provides a significant amount of international directors due to its status as the leading economy of the post-war world. However, despite the growing importance of the economies of China, India, Brazil and Russia during the time period there is no discernible increase in representation of nationalities from those countries. The proportion of international board members from China is 1% at the beginning and end of the analysis and the proportion of international board members from India is 3% at the beginning and end of the analysis period. However, although in 2000 there were no Brazilians represented on the boards of companies within the sample by 2010 1% of international board members were Brazilian. Interestingly we find no Russians represented on the boards of companies within our sample.

20 19 20 19 19 20 20 21 20 23 22 0 5 10 15 20 25 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

No. of Nationalities Represented on UK Boards 2000-2010

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After the United States, the Netherlands provides the second highest proportion of international board members. The board members form the Netherlands are represented on the boards of Unilever and Royal Dutch Shell, two leading Anglo-Dutch enterprises, which were formed before the Second World War. It underlines the importance of business connections formed between countries during earlier periods of globalisation suggesting that the circumstances of the foundation of a business including the mergers, acquisitions and joint ventures continue to effect the composition of nationalities at the board level. The proportion of South Africans represented on UK boards was 12% in 2000 before declining to 6% in 2010. Another significant decrease is the number of Germans represented on UK boards which declined during the period under investigation from 9% to 2%.

Figure 2.1 presents the proportion of nationalities represented from countries with a historic colonial link to the UK as defined in the methodology. The proportion of international board members from countries that were formerly colonies of the UK was 57% in 2000. From 2001 to 2004 a year on year decrease occurs in the number of international board directors from former colonial territories as predicted by the hypothesis reaching a low 54% in 2004. However, after 2004 the proportion of international board members from former colonies increases, reaching 63% of all international board members by 2010. The findings does not support Hypothesis 1a which stated over the period 2000 to 2010 there would be a gradual decline in the number of international board members from countries with a historic colonial link as the proportion increases rather than decreases.

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Figure 2.1 Proportion of International Board Members from a former colony of the UK

The proportion of international board members from settler colonies and non-settler colonies is displayed in Figure 2.2. The number of board members from settler colonies is consistently higher than from non-settler colonies throughout the period.

Figure 2.2 Divisions in International Board Members from Settler and Non-Settler Colonies

The proportion of international board members from non-Settler colonies was 8% in 2000. Rather than increase as anticipated by Hypothesis 1b, it decreased year on year until 2006

48% 50% 52% 54% 56% 58% 60% 62% 64% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Proportion of International Board Members from a former colony of the UK

Proportion of Internation Board Members from a former colony of the UK 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Division Between Settler and Non-Settler Colonies

Proportion from a Settler Colony

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when it reached a low of 3% before raising to 7% by 2010 thus we find no evidence to support Hypothesis 1b. It is apparent that international board members from non-settler colonies have not been recruited to UK boards in significant numbers and only a select number of nationalities are represented. Indeed, the proportion of international board members from non-Settler Colonies is dominated by Singaporeans, Zimbabweans and Ghanaians. Singaporeans are represented throughout the period however Zimbabwean contingent disappears in 2007 and the Ghanaian contingent appears in 2008. The appearance of Ghanaians from sub-Saharan Africa may be indicative of a trend towards more non-settler colonies providing international board members however the evidence is inconclusive.

In Figure 3.1 the proportion of international board members from countries in the European Union is displayed. The proportion of international board members from the European Union has undergone a number of changes. In 2000 the proportion of international board members from the European Union was 40%. From 2001 to 2004 it increased year on year to 44% before decreasing to 38% in 2005. From 2005 the proportion fluctuated before ending at 38% in 2010 representing a 2% decrease in representation overall. The overall decrease in the proportion of international board members from the European Union does not support Hypothesis 2a which anticipated an increase in the number of board members from the European Union. It is apparent that the European Union continues to be a popular recruiting ground for appointments however increased integration has not had the expected impact.

Figure 3.1 Proportion of International Board Members form the European Union

32% 34% 36% 38% 40% 42% 44% 46% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Proportion of International Board Members from the European Union

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In Figure 3.2 the division of international board members from the European Union and when their country of origin joined the European Union is displayed. The majority of international board members from European Union throughout the period originated from founding members of the European Union: France, Germany, Belgium and the Netherlands. The founding members of the European Union represented 72% of all international board members from the European Union in 2000 however in 2010 that proportion has decreased to 67% as more board members from countries which joined the European Union at a later date are represented. The most significant increase in representation is from the countries which joined the European Union in 1973 which were Denmark and Ireland which increased representation to 13% in 2010 from a starting point of 3% in 2000.

Figure 3.2 Divisions in International Board Members from the European Union

More significantly for our purposes Figure 3.2 displays that the no directors from countries that joined the European Union in 2004 namely Poland, Hungary, Slovenia, Czech Republic, Slovakia, Cyprus, Malta, Estonia, Latvia and Lithuania nor from countries that joined the European Union in 2007 namely Romania and Bulgaria are represented on the boards of the

0% 10% 20% 30% 40% 50% 60% 70% 80% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 P ro p o rt io n

Division in International Board Members from the European Union By Year Country Joined European Union

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UK companies. Thus no evidence has been found to support Hypothesis 2b which stated that over the course of the period an increase in the proportion of international board members from the new members of the European Union would be detected. The findings display the continued dominance of international board members from the older members of the European Union.

In Figure 4.1 the proportion of international board members from countries which share a common language with the UK is displayed.

Figure 4 .1 Proportion of International Board Members from Countries sharing a Common Language with the UK

It displays that the proportion of international directors from countries with a common language is consistently higher than those without common language. Overall increase there has been an increase the proportion of international board members from countries which share a common language. The findings lend partial support to Hypothesis 3 which stated that there would be a preference for common language but did not predict an increase in the proportion. The proportion of international board members from countries sharing a common language corresponds exactly to proportion of international board members from countries that were former colonies of the UK. It raises doubt amount the validity of the

48% 50% 52% 54% 56% 58% 60% 62% 64% 66% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Proportion of International Board Members from Countries sharing a Common Language with the UK

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common language construct and whether it is a proxy for a historic tie. In future research a more appropriate variable to capture international board members understanding of language could be the percentage of people able to speak to English within the country of origin.

Figure 5.1 presents the proportion international board members originating from countries with common, civil and mixed law systems on UK boards. It displays that in 2000 the proportion of international board members originating from common and civil systems was identical at 41%. Over the course of the period companies display a preference for board members from common law countries rather than civil or mixed law companies except in 2004 when the proportion of board members from civil law countries was 1% higher than common law countries. However, the proportion of board members from common law countries increased from 41% in 2000 to 53% in 2010 while the proportion of board members from countries which had civil law system or a mixed law system declined. The findings give partial support to Hypothesis 4a which stated that companies would prefer international board members from the common law countries but did not predict the increase in representation from common law countries that has been found.

Figure 5.1: Proportion of International Board Members represented on UK boards categorised by law system of country of origin

Figure 5.2 displays proportion of international board members categorised by the percentile rating of regulatory effectives as measured by the Worldwide Governance Indicators. It

0% 10% 20% 30% 40% 50% 60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Proportion of International Board Members represented on UK boards

categorised by law system of country of origin

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shows that throughout the period international board members from countries with a high corporate governance rating of 80-100 were predominant. The proportion of international board members from countries which have rating below 60 is limited. The findings signify that companies place a high premium on effectiveness of the regulatory system of their international board members countries of origin and support Hypothesis 4b which stated that companies would prefer international board members to originate from countries with a high corporate governance rating.

Figure 5.2 Proportion of International Board Members categorised by percentile rating of their country of origin’s regulatory effectiveness

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Proportion of International Board Members categorised by the percentile

rating of their country of origin's regulatory effectiviness

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In Figure 6 the figures for the proportion of international board members from countries rated low, medium, high and very on the Human Development Index serving on UK boards are displayed. It reveals that UK boards displayed a continued preference for international board members from very highly developed countries.

Figure 6: Proportion of International Board Members represented on UK boards categorised by country of origins HDI Rating

In Figure 7 the geographic distribution of the nationalities of international directors is displayed. It displays that North Americans and Europeans are the most represented nationalities on UK board. Europe provides the most international board members between 2000 and 2004 however in 2005 North America supplies the most board members. Board

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Proportion of International Board Members represented on UK boards

categorised by country of origins HDI Rating

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members whose country of origin is in Asia and South America are under represented on the boards of the leading UK companies. The Asian contingent never increases above 10% and South American contingent never increase above 5%

Figure 7: Geographic Distribution of International Board Members

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Geographic Distribution of International Board Members

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Discussion and Conclusion

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The findings display another surprising development which was contrary to expectation, in that the proportion of international directors originating from the European Union has declined rather than increased over the period. The decrease in the proportion of international board members from the European Union can be understood from a resource dependency perspective. The reduction in barriers between the UK and other member states of the European Union has reduced the imperative for UK companies to have European board member to gain access to and exploit resources. The opening up of markets, the removal of trade barriers and common regulation does not require a specialist understanding which would have been provided by an international board member. Moreover, historic business networks may have displayed more resilience in response to globalisation than anticipated; and the pan-European business networks may not have sufficiently developed. In addition, the educational systems within Australia, Canada and New Zealand all have a common heritage and as Kumar (1988) India education system has not significantly changed since decolonisation.

The argument proposed by Jones and Khanna (2006) of the necessity of understanding the role history plays in business is supported by the findings. The formal and informal ties between countries identified by Makino and Tsang (2011) can explain the resilience of the historic relationship in the face of globalisation. The historic ties allow for interaction and create a common understanding and affinity which globalisation cannot undermine. In fact, companies may seek comfort in reverting to historic ties in the appointment process to reduce the uncertainty in appointment of an international board member. The presence of historic ties implies knowledge, recognition and legitimacy. In business and especially on the global corporate board legitimacy is a valuable commodity which has a high premium. Legitimacy can only be realised by knowledge and recognition which is made easier where commonalities exist between the UK and the country of origin of an international board member.

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expansion thus it could explain the reason for increase in international board members from countries which were former colonies of the UK. The geocentric companies are also likely to have developed significant overseas operations and supply networks which were in place before decolonisation. The existence of such operations and supply networks generates a high dependency and encourages the appointment of board members from these countries rather than the European Union where operations may be minimal.

Another interpretation of the findings is that UK boards continue to be attractive for board member from countries that had a colonial relationship because of the financial rewards associated with serving on a UK board. Recent research has demonstrated that FTSE100 directors have benefitted from lucrative remuneration packages and share incentives. Figures compiled in 2009 (Guardian, 2009) suggest that the combined remuneration package for all FTSE100 directors was in excess of £1billion pounds. Also, on the supply side of board appointments, board members from former colonial countries made continue to see an appointment on a UK board as being particularly prestigious and challenging, making the appointment more attractive for career minded board members. The UK is continually highly rated for its cultural vibrancy and a directorship on a UK company enhances the CV. Likewise, the necessity for directors from the European Union to move to the UK may be lacking, as they already have prestigious appointments and lucrative packages. The failure of the UK to join the single currency in 2000 and the continued hostility towards the European Union displayed in some political and business quarters may explain the decrease in the number of directors from the European Union.

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of the UK from those countries may increase in coming years. The lack of growth in European Union directors may also have its roots in history. It is significant that despite being a leading economy and the economic power house of Europe, the number of German board members is relatively low in comparison to the number of French and Dutch board members, suggesting continuing animosity based upon historic interactions during the twentieth century. Likewise, the lack of representation from the newly admitted states of Central and Eastern Europe could be linked with continued distrust based upon Cold War propaganda and disinformation. The psychological barriers at the moment may remain too high.

Interestingly, the proportion of international board members with a common language replicated the proportions for colonial association. It is not surprising as common language suggests a historic association and it could be argued that language is a superior construct to colonial heritage. The importance of common language should not be underestimated as Welch, Welch and Piekkari (2005) ascertain that language is critical to the functioning of effective management processes as it significantly affects communication flows and knowledge transfers. The ability to communicate effectively in with a common language which directors share and understand the nuances is therefore preferred to a rudimentary understanding of a common language. Grant (1996) comments that knowledge can be transferred more efficiently when expressed through a common language and it acts as a mechanism to facilitate integration.

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board thus risks dividing itself into subgroups thus preventing from exercising its role effectively and efficiently.

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Limitations and Future Research

To ensure consistency the sample was restricted to directors from companies which were listed continuously on the FTSE100 index across the time period. It resulted in a reduced sample size of 48 companies from a potential sample size of 178 companies. Additional research could widen the sample size to include all FTSE350 companies in the study, which would increase the sample size while still retaining the compatibility and consistency. The study focuses upon the nationalities represented on UK boards therefore will suffer from problems associated with the generalizability the findings. A cross-sectional approach may have been more beneficial, which considered a number of European Union countries, to identify whether the formal and informal ties between other countries had the same impact upon the national diversity within boards of directors. It has been identified that France, Spain, the Netherlands and Portugal have maintained stronger formal and informal links with their former colonial territories (Brysk, Parsons, and Sandholtz, 2002) and it would therefore be interesting to identify whether similar trends in the nationalities represented on the boards with these countries exhibited the continuing preference for international board members from former colonies.

Changing with the times?