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2014-05-15 05:37:03
Leaders of Western companies are less globally minded than they think they are
May 10th 2014
THE heads of multinational companies like to think of themselves as generals in
the globalisation wars. They dream of conquering fresh markets in the East.
They boast about the diversity of their armies. And they love to mock
politicians for their parochialism: why is Ed Miliband, the leader of the
British Labour Party, making such a fuss about Pfizer s bid for AstraZeneca
when the first is run by a Scotsman and the second by a Frenchman?
Which all makes a lot of sense: companies in developed countries do themselves
nothing but harm if they fail to think globally. The biggest growth
opportunities now are in the emerging world: McKinsey, a consultancy,
calculates that people there will buy $20 trillion-worth of goods a year by
2020. So are the biggest threats: China s Huawei has grown rapidly from an
improbable idea into one of the world s biggest telecoms companies.
But how good are these generals at applying the logic of globalisation to
themselves? Pankaj Ghemawat, of Spain s IESE and NYU s Stern business schools,
calculates that only 12% of the world s Fortune Global 500 the largest
corporations by revenue are led by a CEO who hails from a country other than
the one in which the company is headquartered. (By contrast, almost 50% of the
managers of football clubs in England s Premier League were born abroad.) The
figure for firms senior management as a whole is 15%. These two numbers are
highly correlated: in Fortune Global 500 companies with foreign CEOs, 50% of
the management team is foreign as well, compared with only 10% at companies
with native CEOs. The proportion of foreign CEOs rises to 30% if you look at
the 100 biggest companies, but it quickly falls to single digits if you look
beyond the largest 500.
European companies are the most cosmopolitan at the top: 23% of the bosses of
European firms on the Fortune Global 500 list are foreigners, as are 28% of the
senior managers. North America is just average, with 11% and 13% respectively.
Japan comes a dismal third among rich-world countries: only 3% of CEOs and 5%
of senior managers are non-Japanese. One of the leading foreign CEOs, Han
Chang-Woo, of Maruhan, moved to Japan from South Korea in 1945 at the age of
14.
There are good reasons to think that leaders will become even more parochial in
the future. Western companies are finding it harder to recruit high potentials
in emerging markets. Two decades ago they had the field to themselves. Today
they have to compete with fast-growing local companies and constantly confront
the question, Why should I work for a company that is run by people who look
like you when I could work for one which is run by people who look like me?
Western firms are also cutting the number of people they send abroad: according
to one study the proportion of expats in senior-management roles in
multinationals in the biggest emerging markets declined from 56% to 12% between
1998 and 2008. And the Europeans and Americans are making poor use of those
people: another study shows that staff who do a spell abroad take longer to
move up the organisation than people who stay at headquarters. In other words,
go-getting executives do better to spend their time politicking at central
office than acquiring experience abroad.
Why does this matter? The obvious reason is that, in a globalising world,
parochialism at the top can impose huge costs, in terms of reduced creativity,
missed opportunities and cultural blundering. A growing body of research
suggests that mixed teams are more likely than homogeneous ones to come up with
creative solutions. Native CEOs tend to surround themselves with senior
managers who resemble them. They are also more likely to fixate on a native
solution to a strategic problem than to consider other options: Germans look
to mechanical engineering for answers, Britons favour the financial sort.
Mr Ghemawat argues that C-suite parochialism helps to explain the relatively
unimpressive performance of Western multinationals in emerging markets. Bain &
Company, a consultancy, looked at the performance of 92 Western firms with
listed subsidiaries in such markets. These companies increased their profits
there by an average of 15% a year between 2005 and 2010. But comparable local
companies boosted their profits by 23% a year.
McKinsey calculates that companies headquartered in emerging markets grew
roughly twice as fast in those markets as those headquartered in developed
economies and two and a half times as fast when both were competing on neutral
turf in the emerging world. Given that traditional multinationals have
better-established brands and longer histories as global companies than
emerging rivals, a good deal of the difference must be explained by superior
local knowledge.
Hit the road
How can multinationals avoid the evils of bumpkinism? One way is to move
managerial functions to other parts of the world. Procter & Gamble relocated
its global cosmetics and personal-care unit from its Cincinnati headquarters to
Singapore. General Electric s health-care division is moving the headquarters
of its X-ray business from Wisconsin to Beijing. Jean-Pascal Tricoire, the boss
of France s Schneider Electric, has posted himself to Hong Kong. A second
technique is to bring the rest of the world to headquarters. Bertelsmann posts
successful local managers to bucolic G tersloh in western Germany for a couple
of years. Daimler-Benz has decreed that half the participants in its programmes
for young high-flyers must come from outside Germany. A third technique is to
give people from the rich world more opportunities to travel: IBM and FedEx
encourage their executives to provide consulting to emerging-world
subsidiaries. It is always tempting to think that multinational companies are
cosmopolitan by nature; in fact, they have to work hard at debumpkinising
themselves.