World's biggest companies: Still xenophobic, after all these years

June 24, 2013: 11:25 AM ET

Only 14% of the Fortune Global 500 have a CEO from outside the country where the company is headquartered.

By Pankaj Ghemawat and Herman Vantrappen

FORTUNE -- One of the most striking takeaways from a panel on go-to-market strategies at the Fortune Global Forum in Chengdu, China earlier this month was the international diversity in the C-suite of the companies represented.

Carlos Gutierrez, former U.S. Commerce Secretary, pointed out that his predecessor as CEO at Kellogg (K) was an Australian and his successor a Canadian. Brazilian Carlos Brito runs ABInBev, which is by far the world's largest brewer but sells only one-quarter of its beer in Brazil. (ABInBev's chairman, Kees Storm, is Dutch, by the way). Li Shufu, the founder-chairman of Geely, the standard-bearer of globalization among Chinese automakers, recently generated headlines when his company swallowed Volvo of Sweden -- with nearly five times Geely's revenues. His plans to bring Volvo production to China, starting with a plant in Chengdu, will result in non-Chinese holding key roles within the Chinese operations. And earlier at Fortune's Global Forum, we heard from Yuanqing Yang, CEO of Lenovo, whose top management team of 14 includes nationals from seven different countries.

As encouraging as it is to see such multiculturalism at the top of these organizations, the reality is that these examples are unrepresentative. Only 14% of the Fortune Global 500 have a CEO from outside the country where the company is headquartered. The percentage of non-native CEOs is significantly lower for smaller, less international companies -- and rises to 31% for the 100 largest nonfinancial, transnational corporations in the world. The percentage of non-native directors is about the same at those 100 companies.

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Most often, big companies have only one outsider in the top ranks, a lone ranger who may feel too alone. (Imagine the difficulty of being the only foreigner in Lenovo's top management team.) Non-natives also tend to be disproportionately from the same region as where the company is headquartered, suggesting regional as well as home bias. Many of the exceptions to these patterns are the results of cross-border mergers or acquisitions, as at ABInBev (BUD). But for every such case of success, it is easy to specify a failure, e.g., the unworkable power sharing between French and American co-CEOs at Alcatel-Lucent (ALU) after the two companies merged.

Nor does the incidence of top-level globalization seem to be increasing very rapidly. The 14.4% incidence of non-native CEOs in the Fortune Global 500 in 2012 is up only from 13.6% in 2008: at this rate, it would take almost until 2200 to get up to 50%. Note that Switzerland leads the world in terms of the incidence of non-native CEOs in the Fortune Global 500. The U.S. falls right at the global average of 14% non-native CEOs. Only one of the Fortune Global 500 companies from the BRIC countries is led by a non-native.

Part of the reason for this shortage of foreign executives: cross-border assignments have suffered significant cutbacks in recent times. According to one study, the proportion of expatriates in senior management roles at multinationals in China, India, Brazil, Russia, and the Middle East declined from 56% to 12% from the late 1990s to the late 2000s. Data on a small sample of large companies suggest that the proportion of expatriates in large global companies is usually less than 1% of total employment -- often only around 0.1%. There is also evidence that at U.S. and European multinationals, expatriates tend to take longer to ascend the corporate ladder than managers who stay at home. And managers, not just researchers, see this happening. Thus, while more than 60% of respondents to a recent survey conducted during EIU's Talent Management Summit agree that a posting in a major emerging or developed markets should in principle help one's career prospects, only 27% believe this is reflected in their company's talent development strategy. About the same percentage say their firm has no policy towards ex-pat postings, and 37% assert that the organization always tries to recruit local staff for all key roles.

Why does all this matter? Think, first of all, about the message that companies send to their talent pool by consistently selecting native leaders at the top. When ambitious middle managers and young high-potentials working in foreign markets see their career progress artificially limited, they are likely to seek opportunities elsewhere. Thus, according to a Corporate Executive Board survey, highly skilled Chinese professionals' preference for working in multinational over domestic companies in 2010 was only half as strong as it was in 2007. At a time when companies routinely cite the lack of qualified managers as the key constraint on their ability to implement their global strategies, the results are chilling.

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Beyond that, there is also the direct effect on the top leadership itself. One research study concludes that, "while both professional experiences and cultural socialization contribute to the shaping of executives' strategic mindset, national values are stronger predictors of executive decision making." If senior leaders were perfectly cosmopolitan and equally effective anywhere, such a lack of diversity at the top would not matter as much -- but they aren't. In fact, research on team problem solving suggests that diverse teams are more likely to come up with creative solutions.

What can companies do about it? Obviously, inducting non-natives into the top management team or the board is easier than deliberately setting out to pick a nonnative CEO -- although it is important to move beyond tokenism. Other ideas include

  • Rotating country managers between countries (as opposed to only exporting managers from company headquarters);
  • Allowing managers from other countries to spend time at headquarters (Frank Appel, the CEO of Deutsche Post DHL, actually tracks the number of nationalities working at headquarters in Bonn);
  • Establishing divisional or business headquarters outside the home country. General Electric's (GE) health care unit is moving the headquarters of its X-ray business from Waukesha, Wisc. to Beijing;
  • Celebrating the success of managers from other countries when they move up the ranks;
  • Using corporate universities to bring leaders together, and reserving spots for non-natives in particular (Daimler Benz recently decreed that half of the participants in its development program for young managers must be from outside Germany);
  • Emphasizing multinational taskforces and cross-border project work (a major emphasis at Cemex (CX), for example);
  • When making acquisitions, ensuring that the quality of the target company's international talent pool is among the key assessment criteria; and
  • Making sure that non-natives in the organization don't systematically end up on a slow track, as it seems to happen quite often.

In addition to this corporate agenda, there is an agenda for individual transformation as well, for which individuals have to take primary responsibility. At Chengdu, Secretary Gutierrez stressed that  "there is nothing more flattering than cultural curiosity." Nor more educational, he might have added.

Pankaj Ghemawat is the Rubiralta Professor of Global Strategy at IESE and the author of World 3.0; Herman Vantrappen is the managing director of Akordeon, a strategic advisory firm based in Brussels.

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