Building Diversity for the Executive Ranks

Articles

HCLI Research

Published 16 February 2015

As businesses go global, the push for national diversity at the top has grown stronger. But have the upper ranks really become more diverse? Dr Pankaj Ghemawat and Herman Vantrappen discuss the real numbers behind the story.

How globalised are the top managers of large companies? Does national diversity even matter today? And, if so, what should companies do about it? We present some surprising data on the first question, which we build on in addressing the second and third questions.

Where are the Non-Natives?

Given the dearth of data to answer the first question, we decided to compile our own data set by analyzing all the Fortune Global 500 companies as of June 2013.

Our basic finding is that large companies are much less globalised in terms of their top management – home-country hegemony is the rule – than they are in terms of sales and employment, for instance.

In 2013, the incidence of nonnative CEOs in the Fortune Global 500 was only 13% – down very slightly from 14% in 2008. A higher proportion of the 2013 sample were companies from emerging economies, particularly China, which tend to be especially nativistic, but that shift was partially offset by a modest rise in non-nativity in the West. European companies, especially those from Switzerland, lead the world in terms of their percentage share of non-native CEOs. Meanwhile, Asian companies trail in importing foreign CEOs and top management team diversity.

Even more striking than these patterns, though, is the relationship between the two.

Companies with non-native CEOs are, on average, likely to have one-half their top management team members be non-native or foreign, compared to only one-tenth in the case of companies with native CEOs.

The differences are so stark that it is almost as if there were two very distinct clusters of firms: native companies, which predominate, and a small fraction that are not strictly native.

Does National Diversity Matter?

So there are big differences in the national diversity of top management teams at the world’s largest companies. But do these differences matter in an era of expanded jet connectivity, high-definition video conferencing and real-time information feeds?

The short answer is that they do, both for better and for worse. To start on the cautionary side of the ledger, a general proposition about diversity is that given the difficulty of working across such divides, diverse groups risk performing worse than homogenous groups unless diversity is acknowledged and appropriately managed.

What then might make national diversity worth pursuing rather than avoiding? Most obviously, diversity at the top may have a direct, positive effect on company performance. There are now studies that relate organisational performance to top managers’ national diversity; for example, one study concluded that “[top management team] nationality diversity is among the few diversity attributes that help increase firm performance” and “the effects of international experience and functional diversity diminish over time, whereas the impact of nationality diversity becomes stronger”.

In explaining this positive effect, some researchers have focused on how diversity may help boost group creativity. Others have highlighted the big shift that is currently taking place from advanced economies to emerging economies, emphasising that in a context where many companies from advanced countries are looking for growth far from home, employing nationals from the target countries may help forestall some of the “liabilities of foreignness”. And companies from emerging economies tend to be even more nativistic and so could benefit even more if they are looking to internationalise.

Another reason that national diversity at the top matters has to do with signalling.

If a large share of a global company’s assets, sales and employees are located outside its home country, yet it consistently chooses native leaders, this signals limited long-term career prospects for foreign middle managers already in the company and young foreign managers outside.

Difficulties hiring and retaining the right people can aggravate this problem over time. Conversely, selecting a non-native can serve as a very powerful signal as well. Thus, when Satya Nadella, born in India, was appointed Microsoft’s CEO, the larger significance of the move to us resided in the assurance it provided about the absence of glass ceilings at the company – presumably especially valuable to the estimated 30% of Microsoft’s workforce that is Indian.

Solutions, Solutions?

What can be done to relax some of the constraints that limited diversity can impose? In addition to the obvious but difficult step of changing the top management team, there are a range of other directions that companies can push on:

Relocating top management
CEOs and top management teams can be relocated permanently or even temporarily to places outside the company’s home country to help build global bandwidth. For example, Procter & Gamble relocated its global skin, cosmetics and personal-care unit from its Cincinnati headquarters to Singapore. Jean-Pascal Tricoire, the boss of France’s Schneider Electric, posted himself to Hong Kong. Starwood CEO Frits van Paasschen moved his entire headquarters to Shanghai for a month in 2011, and did so again to Dubai in 2013. Expatriation represents another tried and tested way to achieve some of the same results at an individual level – but has suffered cutbacks at many companies in recent years. According to one study, the proportion of expatriates in senior management roles in multinationals in China, India, Brazil, Russia, and the Middle East declined from 56% to 12% from the late 1990s to the late 2000s.
Broadening the pool
Pay attention whether people already have a global outlook, curiosity about the world, and ability to adapt when you recruit them – because it is often easier to select on such attributes rather than try to foment them later. For example, when recruiting for its management trainee programme, Nestlé favours applicants with dual nationality, international parentage or those who have lived in multiple countries. Likewise, companies could change their recruiting policies: many interview non-nationals at top business schools only for postings back at home. This is also an illustration of how much headroom there is to do better by instituting simple changes in day-to-day practices.
Shifting the tone
In addition to concrete actions, symbolism matters a great deal as well because one is talking, in effect, about changing behavioural models, not just business models. Celebrate the success of managers from other countries when they move up the ranks. Hold meetings in new locations even if you do not move your top management there for any significant length of time. Do not require people in other time zones to systematically be up late or early for conference calls at times that are convenient just for people at corporate headquarters. Elect leaders for certain activities through bottom-up voting – this in particular may be a relatively easy way to give opportunities to foreign high-potentials to gain global visibility. For example, the members of the some 150 global “communities of practice” at Schlumberger elect their community leader through a traditional voting process, from a roster of members that have put themselves forward as candidates, for a renewable annual term.