Culture of Inclusiveness Can Help U.S. Multinational Firms Mitigate Negative Effects of Foreign Directors During Cross-Border Mergers
Author: Jian Cao, Ph.D.
Release Date: Mar 08, 2017
MEDIA CONTACT: Jim Hellegaard
561-319-2233, jhellegaard@fau.edu
In recent years, an increase in the number of foreign directors on corporate boards of the United States’ largest multinational corporations has seemingly gone hand in hand with significant growth in the number of cross-border mergers.
The latest example of this trend can be found in Johnson & Johnson’s proposed acquisition of Swiss biotech company Actelion. Johnson & Johnson has had Ian Davis, chairman of Rolls-Royce PLC, a major British manufacturer of power systems, on its board of directors since 2010.
Foreign directors are expected to utilize their knowledge and connections in the local markets the U.S.-based multinationals have targeted for acquisitions, engendering information sharing which enhances the advisory capability of boards in making decisions about global expansion.
But has the internationalization of boards of directors across many countries impacted the advisory and monitoring capabilities of boards in making decisions about global expansion?
My colleagues at the Florida Atlantic University College of Business, Kimberly Ellis and Mingxiang Li, and I tried to answer this question. We studied more than 1,000 CBMs by 738 U.S. corporations in the S&P 1500 index from 1996 to 2013, 20 percent of which employed at least one foreign director prior to the deal announcement.
We found that foreign directors are less likely to fulfill the expectation that they will bring knowledge and resources to U.S. multinational corporations due, at least in part, to potential conflicts in multicultural teams.
On average, the presence of foreign directors on the boards of U.S.-based multinationals substantially reduces the board monitoring function such that the acquiring firms experienced lower returns. The negative effect remains when these directors are domiciled in the country where a merger takes place. However, their presence contributes to lower bid premiums, reflecting some benefits from their local expertise.
Interestingly, the negative effects of having a foreign director on the board are mitigated by the gender diversity on the acquiring firm’s corporate board, which indicates a tone at the top of inclusiveness serves to reduce culture conflicts.
Jian Cao, Ph.D. is an associate professor and Stone Fellow in the School of Accounting at Florida Atlantic University’s College of Business. The opinions expressed in this article are those of the author and do not reflect or represent the opinions of Florida Atlantic University.
