A Two-Way Learning Curve for Transatlantic Directors
from
March/April 2005
by John R. Engen
Boards are developing an increasingly transatlantic flavor as more and more companies add directors from across the pond to help them map out international business strategies, inform them about foreign suppliers and customers, and—perhaps most urgent lately—keep them up to speed on new compliance regulations. “We’re seeing a lot of demand for people who can bring a European perspective to an American board and vice versa,” says Ted Jadick, co-chairman of the worldwide board practice at the search firm Heidrick & Struggles. Data compiled by Corporate Board Member in 2004 show that nearly 370 directors sit on boards on both sides of the Atlantic.
This board service often requires exhausting travel and presents linguistic challenges—some predictable and others less so, such as the language barrier at a British company between a Bostonian and a Scot. But it also provides opportunities to become a better director at home. “I find it expands the mind and your horizons,” says Sir Peter Bonfield, 60, former CEO of British Telecommunications and now a board member at Mentor Graphics, a technology company in Wilsonville, Oregon; AstraZeneca, a London pharmaceutical firm; the Swedish telecom supplier Ericsson; and Taiwan Semiconductor Manufacturing Co. One thing Bonfield particularly enjoys about U.S. boards, he says, is that they play a bigger role in companies’ growth and strategy than their European counterparts do. Robert C. Larson, chairman of Larson Realty Group in suburban Detroit, says his board service at InterContinental Hotels Group in the U.K. has made him a better chairman of United Dominion Realty Trust, headquartered in Richmond, Virginia. “It’s not like being in an alien world,” he says. “There’s an awful lot of shared experience.”
In Finland the board of UPM-Kymmene, a forest-products company, sometimes meets without the CEO in the room—at the suggestion of Donna Soble Kaufman, a Toronto attorney and a (now retired) UPM director. At first, she says, the European board members “were very surprised, asking, ‘Why would we do that? We trust our CEO.’” Her response: “It’s a good discipline to have regular conversations without management present. That way, if something happens in the future where we feel it’s necessary to meet without him, no one’s eyebrows will be raised.” Her fellow directors bought the argument, though “they weren’t entirely comfortable with the idea,” Kaufman says. “But we didn’t like it at first in North America, either.” She has since left that board, but its members still make a point of meeting just among themselves.
Ewald Kist retired last year as executive-board chairman at ING Group, an Amsterdam-based financial-services company, and serves on the board of Moody’s Investors Service in the U.S. and the supervisory boards of Royal Philips Electronics and DSM, a maker of chemical products in his native Netherlands. He says this dual experience has given him a better understanding of shareholders on both sides of the Atlantic. “Americans are blamed for focusing on quarterly numbers, and Europeans are criticized for perspectives that are too long-term,” he says. “Most investors like something in between.”
Kist admires the Moody board’s tradition of holding one meeting a year somewhere abroad (London, in 2004) and inviting the directors’ spouses along. “At this level your spouse is part of your worklife, so it makes sense,” he says. He adds that he’d like to see Dutch companies adopt a similar custom.
At times of crisis, directors say, boards operate in much the same way no matter where their members hail from or where the companies are based. Lodewijk J. R. de Vink, a naturalized American and former chairman and CEO of Warner-Lambert, was a director of the Dutch supermarket giant Royal Ahold when the CEO and CFO quit during a 2003 accounting scandal. “The response was identical to what you’d see in the U.S.,” he says. “As soon as we learned what had happened, the board jumped in and dealt with the situation.”
Still, directors who take on transatlantic assignments discover a lot of often challenging differences, not the least of which is language. Many European boards use English at their meetings, including the board of Gucci Group, the Italian fashion outfit that is now a subsidiary of a French company. Among those that don’t is the Telecom Italia board, which uses Italian. The company provides an interpreter for directors who need one, but “to be effective, you need to have a perfect—and I mean perfect—understanding of the board’s language,” says director Domenico De Sole. Until 2004 De Sole served as CEO of Gucci and on its management board. Recalling a fellow Italian on that board who wasn’t fluent in English, he says, “It was very difficult for him to contribute.” The Harvard-educated De Sole puts his English to further use as a director of Bausch & Lomb, Gap Inc., and Procter & Gamble in the U.S.
Americans may find non-English-speaking boards a challenge, but sometimes even their native tongue can be baffling. Wendy E. Lane, chairman of the Boston investment firm Lane Holdings and a director of Laboratory Corp. of America Holdings and the London-based insurance broker Willis Group Holdings, found herself with a language problem too. She had to ask Willis’s CFO to repeat himself “a couple of times” before she could understand what he was saying. He’s a Scot and has the heavy burr that can go with it.
The language challenges are a big reason Lane and other foreign directors like to attend meetings in person when they can, rather than rely on telephone conferencing. “I want to listen to the subtleties in their speech and read the body language,” Lane says. “What are they really saying? What are the undertones? Are they expressing something different from the words coming out?”
Often the answer is yes, particularly on European boards. De Sole’s experience as a director on both sides of the ocean leads him to believe that “Americans are much more direct” than Europeans, which makes meeting by telephone more practical. On the Continent, he says, “you really need to be in the boardroom to read the situation correctly.”
Showing up in person for board meetings across the Atlantic adds tremendously to the workload, though. De Sole recalls how Gucci directors fought off a hostile takeover bid in 1999, but only after about 25 meetings in two months by the board, which included two Americans. “The activity level skyrocketed,” he says. “We were on the phone a lot, but there were a lot of times when we had to meet personally, which meant those Americans had to come over.”
The travel burden was particularly brutal for Donna Kaufman during her service at UPM-Kymmene. At first the assignment was a delight. The board members, who spoke English, met the night before each of their meetings in Helsinki, dining on venison and other Finnish delicacies, and “by the time dessert was over we’d have covered everything on the agenda,” says Kaufman, who serves on the boards of Bell Canada Enterprises, retailer Hudson’s Bay Co., and TransAlta, a Canadian energy firm. “It was arguably the most interesting and unusual board I’ve ever served on. Very elegant.”
But it also called for a tough commute. The lack of direct flights between Toronto and Helsinki meant changing planes at airports in such places as New York City, Frankfurt, and London, and Kaufman figures she was spending about 45 days a year just getting to the board meetings and then home again. After three years “it became impossible to manage,” she says, and she resigned in 2004.
Travel demands largely explain why so few active CEOs serve on foreign boards, even though they remain the most favored choice as outside directors. “The reality is that combining a demanding executive job on one continent with a non-executive directorship on another is very onerous. You just don’t see it happen that often,” says Krister Svensson, a director recruiter at Career Management International in Brussels.
Most directors who sign on at a foreign company are in for surprises. Fred G. Steingraber, retired chairman and CEO of the U.S. consulting firm A.T. Kearney and a director of home-appliance maker Maytag in the U.S. and tiremaker Continental AG in Hanover, Germany, notes that annual general meetings in Germany can be all-day affairs, compared with the one-hour in-and-outs common in the U.S. “They invite all the stakeholders—union representatives, shareholders, suppliers—and feed them a warm lunch,” he says. And pretty much anyone is permitted to rise and wax on about subjects like environmental or safety issues for as long as they wish. “The chairman doesn’t have the right to command them to sit down,” says Steingraber. Although such encounters inevitably create tension, “these are real-world issues, faced by German business leaders all the time,” he adds. “They can’t be dismissed by the board.”
Other differences are more substantial. With few exceptions, members of American boards are better paid than their European counterparts, thanks largely to more extensive awards of equity and options. “You’re not going to get rich” on a European board, notes Bill Gantz, chairman and CEO of Ovation Pharmaceuticals in Chicago and a director of W.W. Grainger, a Lake Forest, Illinois, distributor of industrial products; Gillette; and Gambro, a manufacturer of dialysis equipment in Stockholm. While he declines to disclose his compensation at Gambro, he says it is “enough to make it worth the effort. But it really doesn’t compare with what you might find in the U.S.”
Brian Cheffins, a law professor and governance expert at Cambridge University, says that dozens of lawsuits are filed each year against U.S. boards, versus a mere handful across all of Europe. “A director in the U.S. can be jailed longer for a financial offense than someone gets for murder in the U.K.,” Bonfield says. “A lot of Europeans find that a bit discomforting.” Even more discomforting, of course, has been the news that former directors of WorldCom and Enron agreed to pay millions of dollars out of their own pockets in settlements with shareholders.
The hyperactive class-action bar in the U.S. is largely to blame for creating such nervousness, but America’s “rules-based” approach under the Sarbanes-Oxley Act also plays a role. Many Europeans see the new disclosure requirements as a double-edged sword. “The transparency fostered by the U.S. laws gives a board insights and detail we don’t have in Europe,” says Göran Lindahl, former CEO of the Zurich-based electrical-engineering conglomerate ABB. On the other hand, he believes that the time directors of U.S. companies spend on compliance takes away from discussions of strategy, a view that is widely shared on both sides of the Atlantic.
Europe’s legal requirements can be no less befuddling to Americans, partly because they vary by country. The EU structure promises a convergence of standards at some point in the future, but for now the 25 member countries have a virtual alphabet soup of regulatory frameworks and rules. (See “The Race to Stay Ahead of the Regulators in Europe” on page 56.)
Americans who sign on to European boards also have to contend with many more insiders than are prevalent in post-reform America. The board of Britain’s InterContinental Hotels Group, for instance, has traditionally included a roughly fity-fifty mix of executives and outsiders. Says one of the latter, Robert Larson: “The advantage is, you get a broader perspective on some issues. The downside is that they all work for the CEO and might not be as forthcoming as you’d like.” Sometimes a director from the New World can do little but shrug if things don’t make complete sense in the old one. As an American director of Bookham Technology PLC in Oxford, England, Arthur “Skip” Porter came to the conclusion that employees cared more about pension benefits than about getting a pile of stock options—a common reward in the U.S. technology industry, where he serves on two boards, Electro Scientific Industries and Stewart Information Services Co. Bookham itself made the move to the New World last year, settling in San Jose, California, and changing its name to Bookham Inc. “Americans are far more entrepreneurial,” Porter says. “We’re the descendants of people who were willing to get on a boat and start from scratch. It’s in our genes. All the people who weren’t willing to do that are over there, and their descendants want to know what their pension is going to be.”
In some European countries, companies have two boards—a supervisory one, which can include a mix of non-independent directors, employees, and outsiders, and an executive one made up of executives and managers. In places like Germany and the Netherlands, the supervisory board usually includes a hefty representation of various unions, which further complicates meetings. Consumers, vendors, and institutional investors also frequently get involved in board-level business. Thus when the supervisory board of Continental AG meets, the gathering includes not only 10 outside directors and 10 employee representatives but also senior managers serving on the executive board. Before meetings, these blocs gather on their own to formulate negotiating strategies, and often management and workers strike agreements ahead of time on contentious issues such as layoffs or plant closings, which the supervisory board—technically responsible for oversight—dutifully rubber-stamps.
Some U.S. directors say they occasionally feel more like chaperones than strategic decision-makers in such situations, and find the experience grating if they’ve been schooled in the recent push for more independent boards. “The uninitiated American isn’t going to be able to understand it,” says Continental board member Fred Steingraber. “It can be very awkward and inconvenient and frustrating. Why spend all this time on these kinds of issues?”
But as Bill Gantz discovered during board meetings at Sweden’s Gambro, surprising traditions sometimes do make sense. At his first board meeting in 2001, Gantz says he “expressed concern” about the two union representatives on the board: “I was worried that it might limit conversation about issues like plant closings and create some awkward moments.” With time, he has come to see the benefits of worker participation. The representatives don’t talk much, he says, and having them present helps foster cooperation.
When Gantz joined Gambro’s remuneration committee, he got another surprise—one he’s less likely to warm to. After the committee and full board had agreed on executives’ long-term compensation, institutional shareholders were allowed not just to review those packages with the chairman but to demand changes in the triggers for stock-option grants that were less favorable for management. “I couldn’t believe that shareholders got into that level of detail over compensation, and you could tell they had done it before,” says Gantz. “I shouldn’t have been surprised. But to actually see that level of shareholder influence on the details of a pay package was much different from anything I’d ever seen in the U.S.”
Shareholders and employees aren’t the only people wielding power in Europe’s boardrooms. Göran Lindahl, the former CEO of ABB and a director of Anglo American, a London-based mining company; Swedish retailer IKEA; Japan’s Sony; and Nanomix, a privately held nanotechnology firm in Emeryville, California, says European companies must also weigh the demands of consumers and society at large. “You have environmental programs, contributions to local schools,” he explains. “It’s a much more complex world than most Americans are accustomed to.”
Indeed, one of the biggest complaints on the part of Europeans is the single-mindedness or lack of complexity of U.S. companies. Another is American boards’ perceived focus on the U.S. at the expense of other parts of the world. Some directors fret that their value is minimized because of such U.S.-centricity. “You don’t want to end up being the token European on an American board,” cautions Peter Bonfield, who recently turned down a board seat at a large American pharmaceutical company because “it didn’t seem that the board’s mind-set was truly international.”
As always, directors who are invited to join a board should examine the invitation carefully, no matter how flattering a faraway suitor may seem.
CORRECTION
Owing to an editing error, a quote in “A Two-Way Learning Curve for Transatlantic Directors” (
Corporate Board Member
, March/April 2005) was misattributed. It was company director Sir Peter Bonfield who said, “A director in the U.S. can be jailed longer for a financial offense than someone gets for murder in the U.K. A lot of Europeans find that a bit discomforting,” not Brian Cheffins, a law professor at Cambridge University.
