Heidrick & Struggles: Building an Effective and Diverse Board: Lessons From Asia

The Heidrick & Struggles’ CEO & Board Practice has been built on their ability to execute top-level assignments and counsel CEOs and board members on the complex issues directly affecting their businesses.

As the Asia Pacific region continues to play a growing role in the global economy, regional corporations are increasingly expanding their footprint beyond Asia. To assist with their ambitions for expansion, Asian companies are starting to look for ways to build more diverse leadership teams, boards, and executive committees. Although diversity is crucial to creating more effective boards and improving corporate performance, it must be understood in a much broader sense than is seen in many current boardroom discussions.

Today’s regulatory changes are encouraging greater diversity. Hong Kong, Japan, Malaysia, and Singapore, among others, are requiring companies to increase the diversity of their boards—or explain any shortcomings. The aim is for listed companies to consider the benefits of diversity, and examine whether their board consists of a balance of skills, experience, and mind-sets.

Family businesses are an integral part of most economies in Asia. In a 2014 report, the consulting firm Ernst & Young found that 85% of companies in the Asia Pacific region were family-owned businesses and that these companies accounted for 32% of market capitalization in the region.3 The level of generational experience in governance differs—from Japan, which has some of the world’s oldest family-owned businesses, to China, which has some of the youngest.

Diversity can be more difficult to achieve in family-owned businesses because executive power is usually concentrated within a group of relatives, and independent board positions are less common than in companies with broader ownership structures. The founders and co-founders often serve in executive positions on the board. In general, these businesses are more reluctant to take on board members from outside their inner circle: when board members or financial controllers who are not relatives resign, families tend to bring in familiar faces, as they are not comfortable inviting strangers or foreigners to help make major decisions about the future of the family business.

A recent increase in mergers and acquisitions by Asian firms implies that many subsidiary boards have likely emerged in these companies. Unfortunately, not many of these parent and subsidiary boards share and align strategies that would help ensure effective and transparent communication. Given the differences in the directors’ interests, the board dynamics of these newly merged companies may also become more complex when it comes to board nominations. Therefore many steps need to be taken to enhance board effectiveness before these businesses can consider building diverse boards.

While board diversity is straightforward in principle, in practice it is about making choices. Companies looking to improve board diversity should therefore begin with a close look at their overall objectives to ensure they’re getting the most out of alternative thinkers and other diverse members. The role of the chair is key.

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