Doing business in China has never been easy for foreign multinational companies – but it is about to get even tougher. The rapid development of the Chinese startup scene and the fast-changing tastes of the Chinese consumer create an exceptionally dynamic market that can be difficult to master from overseas. In addition to the speed of China’s own market development, the emergence of highly competitive global Chinese companies is putting unparalleled pressure on multinational companies in terms of talent, innovation, and performance. And as if those challenges were not enough, government proposals to reform the competitive capabilities of China’s behemoth state-owned enterprises are already in the works.
Even as these new dynamics play out, many standard (and difficult) rules of engagement remain true. More so than most geographies, success in China depends heavily on developing a trusted network, known as guanxi. Government regulations and relations are complex, especially for foreigners, and often require personal connections at both national and regional levels to smooth out business issues, above and beyond check-the-box compliance. Local experts can also help Western companies read the political and economic trends in China in a way that may not be obvious to an outsider, anticipate changes in regulations, and help identify business partners for mergers and acquisitions (M&A), joint ventures, and other new opportunities.
For multinational companies operating in China (or planning to do so), including directors with China expertise on the board is becoming increasingly essential. Companies that lack this deep in-country perspective face a significant handicap that relegates them to learning from mistakes over time, as opposed to getting ahead of the curve. Yet next-generation China experts who fit the traditional director profiles are in short supply, meaning companies must get creative to succeed.
Where are all the Chinese directors?
The increasing demand for Chinese board directors is clear, but fulfilling that demand is less straightforward. The statistics show just how rare Chinese directors are on the world’s major exchanges. Only seven of the companies on the S&P 500 index currently have a director of Chinese or Taiwanese descent, as do just eight of the FTSE350, and five of the ASX All Ordinaries, according to publicly available sources. Overall, just over 100 Chinese individuals are currently serving as directors of publicly-traded companies in North America, Europe, or Australia. While this research admittedly doesn’t include China experts who are not Chinese by birth, it is clear that many Western boards lack genuine local understanding and insights into this $11 trillion market (often while promising their shareholders that Chinese consumers will drive future success).
Besides revealing a governance gap from a Western perspective, this lack of Chinese representation in the boardroom also presents an operational and strategic gap between the board, management, and shareholders’ interests. To succeed in China, good governance and well-managed operations are key.
Board director profiles in China are evolving
Until recently, board director candidates with expertise in China fell into five main categories:
The landscape has now shifted. Recent Chinese government regulations ban former officials from serving on boards for five years after they retire, making the first category of director candidates less viable. To fill the void, two new populations have emerged. The first is the Chinese startup founder/CEO, and the second is the Chinese retired professional services provider – often a consultant, banker, or lawyer.
Chinese startup founder/CEOs are attractive on paper. Last year, China was among the top three destinations for venture capital in emerging sectors such as artificial intelligence (AI), financial technology (fintech), and robotics, according to McKinsey Global Institute, and it is home to more than 25 percent of the world’s startups valued at over $1 billion (“unicorns,” as they are commonly called). By inference, successful Chinese entrepreneurs are ahead of the curve, developing technologies and consumer propositions that reflect an intimate and anticipatory knowledge of the market. They are not only knowledgeable about the Chinese economy, they are personally defining the future at home and abroad. As such, they are highly sought after by Western boards. However, these same entrepreneurs are typically strapped for time and are highly selective in how they spend it. While they may consider one overseas board seat as a validation of their own market success and a valuable way to build international networks, a second will likely hold less appeal unless there is exceptional mutual interest. In addition, onerous governance requirements in more mature markets can also be off-putting.
The second category of the retired professional advisor is often an uncomfortable profile for Western chairmen to consider as this group doesn’t always neatly map to the traditional profile of a retired CEO. A former regional chairman of a bank, consultancy, accounting firm, or law firm may not be perceived to have truly run a business, and will almost certainly be one of the younger candidates considered for a directorship. However, they are in greater supply than current or retired CEOs from other industries in China, and often have excellent bi-cultural skills, with overseas educations, training, and career stints. They also tend to be extremely well-connected and remain active in Chinese business and political circles.
As for the other three traditional categories of board candidates, we see some changes at the margins. Retired Hong Kong- or Singapore-listed company CEOs (and other executive directors), especially those with good connections on the mainland, continue to be in demand by Western board directors. However, they are also in considerable demand at home, so the recurring issues of time commitment, travel, and governance concerns again come into play.
Retired regional Chinese CEOs of multinationals have much to offer as board directors and are already a go-to pool of candidates. This pool will likely grow in size and demand. Regional leadership roles at MNCs have been increasingly localized in the last 10 years, in parallel with a growing need for more sophisticated and strategic leadership skills to meet the burgeoning complexity of the China market. Success in China is now more dependent on a true understanding of China, not the execution of a globally applicable strategy, and this conferred autonomy will produce a new generation of board-ready Chinese board directors over the next five to 10 years.
Retired “China expert” Westerners, i.e., executives who spent a significant portion of their careers in Asia, are perhaps the largest group: there are more of them on public boards globally than Chinese directors. Fifty-nine British executives with experience in Asia serve as non-executive directors on FTSE100 boards, for example, compared to five Chinese nationals, according to a recent Russell Reynolds Associates analysis.
The historical context for this trend is understandable. Looking to the future, however, it is questionable whether the knowledge, intimacy and insights that a Westerner brings will add sufficient value to a board. They undoubtedly have a plethora of relationships that can withstand the test of time, and they can “relate and translate,” or present ideas and provoke thinking around China in a way that is palatable and understandable to a Western chairman. However, with the acceleration from “Made in China” to “Created in China,” and the exceptionally fast evolution of the market in general, the currency of their knowledge diminishes at a far faster rate than in the past and this must be taken into consideration when appointing a Western “China expert” to the board.
Find a strategy that works for your board
To protect shareholders’ interests by having access to the best advice in the boardroom, and to develop a true competitive edge in China, Western boards need to develop an appointment strategy that works for them. But given the limited supply and high demand for the ideal candidates, they also need to be prepared to be creative in how they identify and recruit those individuals:
Reimagine the ideal profile: Give genuine consideration to non-CEO candidates and “next gen” leaders. They may not match the traditional candidate profile, but they can still bring tremendous value to the board.
Know the motivations of the candidate: While many Western boards offer relatively generous compensation to board members, money isn’t going to be the motivation for most Chinese candidates. Knowing the candidate well enough to understand their true motivations, and appealing directly to those desires, may be a more powerful recruitment proposition than pure remuneration.
Be committed to China: To appeal to Chinese candidates, Western companies need to prove a serious commitment to improving life in China, whether that’s through innovation, healthcare, education, or similar efforts. Companies which extend a degree of autonomy to their China operations are more attractive. Equally, Western boards should be comfortable with exhibiting a degree of humility to learn about China and embrace new information. Things may look very different on the ground than they do from the boardroom.
Double up: If the board constitution and composition allows, appoint both a Chinese director and a Western “China expert.” This combination simultaneously brings deep connectivity in China and insights that can be decoded for a Western board, while protecting against the fading currency of a retired expat.
Look overseas: Not all qualified Chinese director candidates are based in China. A well-connected individual may be based elsewhere, provided they travel to China at least six times a year, speak Mandarin, have spent part of their career as a senior executive there, and have active business interests in the country.
Go digital: China is at the forefront of innovation. Having a strategy that combines technology in its broadest sense with Chinese growth and development will not only benefit the company, but will make a board appointment more attractive to many Chinese candidates.
Chair the room differently: Be sensitive to cultural nuances and make plenty of time for Chinese directors outside the boardroom to allow them to air views they can then bring to the wider board in the right setting. Consider whether a small minority of meetings could be conducted virtually rather than in person to minimize travel requirements and the impact of jetlag.
Thoughtful directors taking thoughtful risks
Appointing a Chinese director is not a point of cosmetic diversity that fits with today’s zeitgeist. It is a matter of hard-edged competitiveness, first-class governance, and enhancing shareholder value.
Success in China for multinational companies depends on the quality of advice they receive and the depth of relationships they can tap. As Beijing charts its economic and political course for the next 30 years, multinationals must be ready to take the thoughtful risks on board appointments that will ensure their relevance in China in the coming decades.