Foreign Directors And Corporate Governance

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Foreign Directors

John Manuel Barrios Jr.

University of Chicago – Booth School of Business

Pietro A. Bianchi

University of Miami – Department of Accounting

Helena Isidro

ISCTE IUL Business School

Dhananjay Nanda

University of Miami – School of Business Administration

October 15, 2015


This paper examines the global labor market for corporate directors with a focus on the macro determinants of director appointments on foreign boards and the micro determinants related to director characteristics associated with foreign appointments. Using a gravity model, we find that economically important countries attract a larger number of foreign directors from other economically important countries. Further, common borders and geographic proximity increase the exchange of foreign directors between countries. With respect to individual directors’ characteristics, we find that the likelihood of becoming a foreign director is lower for directors with an expertise in accounting, for female directors, and directors with a single board appointment the year prior to the international appointment. Yet, older and more experienced directors, those with an MBA or an Ivy League degree have a higher probability of becoming a foreign director. We conduct an array of robustness test using firm characteristics and we examine the duration until the first international appointment. Our cross-country analysis of the labor market for foreign directors is the first to our knowledge in the literature.

Foreign Directors – Introduction

The removal of restrictions in the cross-border flows of trade and capital over the past few decades combined with the development of new technology has resulted in the interconnectedness of labor markets around the globe.1 This globalization has impacted the corporate sector. Specially, the multinational face of businesses has increased the demand for foreign directors, as international expertise is viewed as a key factor for corporate success in the global market.2 Coverage of the globalization of corporate boards in the business press includes discussions of the trend toward more diverse boards, their desirability and/or inevitability (Lublin 2005). If asked about the nationalities of their directors, firm representatives typically respond that they appoint individuals based on their experience, training, and expertise, and that a diverse board is essential for global business success (Staples 2008).3 In this paper, we examine the global labor market for corporate directors to identify what determines director flows between countries at both the country and the individual level.

The topic of corporate directors has been extensively covered in the literature (Adams, Hermalin, and Weisbach 2010). The ability of corporate directors to effectively monitor management on behalf of shareholders is central to corporate governance and crucial for the development of a well-functioning financial market (Jensen 1993). The labor market in this case motivates directors to 1) act in the best interests of shareholders, and 2) develop reputations as experts. Fama (1980) argues that the effects of reputation in the labor market can mitigate (possibly even eliminate) directors’ agency problems. Yet, much of the extant literature has concentrated on within country studies, focusing on individual directors and extreme events in the national labor market as opposed to the general director movement across countries. Consequently little is known about the increasingly global nature of cross-border corporate directors flows (Yermack 2004).

In order to examine the global labor market of corporate directors we use BoardEx to compile a cross-country database covering 172,799 directors appointed to 26,940 companies in 39 countries between the years of 2000-2013. We employ a gravity model to explain the crosscountry flows of foreign directors. The gravity model, first introduced in international economics by Tinbergen (1962), predicts that a mass of goods supplied at the origin country is attracted to a mass of demand for these goods at the destination country. Frictions such as geographic, cultural and institutional distance between the two countries reduce this flow (Anderson 1979; Anderson 2010). The gravity model has been extensively used to explain international trade, foreign investment and immigration (e.g. Beine, Docquier and Ozden 2011; Grogger and Hanson 2011; Subramanian and Wei 2007; Aggarwal et al. 2012; Kleinert and Toubal 2010; Guiso et al. 2009; Lewer and Van den Berg 2008).

In the spirit of previous studies (Anderson and Marcouiller 2002; De Groot et al. 2004; Berkowitz et al. 2006; Guiso et al. 2009) examining the impact of country-level institutional variables on trade, we study the effect of match-specific country factors on cross-country labor flows of foreign corporate directors. Specifically, we begin by relating foreign director exchange between pairs of countries on economic, cultural, and geographic factors that represent commonalities between the countries. Consistent with the gravity model, we expect greater director exchange between larger countries. Directors from economically and institutionally significant countries would prefer to work in other equally important countries because commonalities between the countries encourage transactions and reduce relocation costs (van Veen et al. 2014).

Foreign Directors

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