BOARD COMPOSITION AND FIRM INTERNATIONALIZATION

JOSE LUIS RIVAS

IE Business School
Maria de Molina 12 Bajo
Madrid 28006, Spain
Phone: +34 91 5689600 / 9733
Email: jlrivas.phd2009@alumno.ie.edu
MONIKA HAMORI
IE Business School
MARGARITA MAYO
IE Business School
ABSTRACT
Drawing on the Upper Echelons perspective, we find that international experience and
the average tenure of the board are positively related and the average age of the directors is
negatively related to internationalization. We find no relationship between the functional
background and former government experience of the board and internationalization.
INTRODUCTION
Globalization of the market has been identified as one of the most significant changes
in the business environment over the last decade (Earley & Gibson, 2002). International
revenues represent an average of 36.9% of total revenues and are growing at almost twice the
rate of overall revenues in the period between 2005 and 2008 (Egon Zehnder, 2008).
The issue of how firms manage the complexity that arises from internationalization
remains one of the most important questions in the fields of international and strategic
management (Kim & Mauborgne, 1996). Yet, while the Chief Executive Officer (CEO) and
the top management team (TMT) have attracted most research attention, few papers have used
the board of directors as their unit of study.
The board and the top management team not only assume distinct roles but also
maintain competing, if not sharply divided, goals and agendas. According to Fama (1980),
`the boards most important role is to scrutinize the highest decision makers within the firm
and to provide a low cost mechanism for replacing or reordering top managers`. Additionally,
Jensen and Zajac (2004) concluded that we should distinguish between all the different
subgroups of corporate elites that occupy similar governance positions.
Although boards have an important role in the corporate strategic orientation of the
firm (Kosnik, 1990), especially in the internationalization process (Daily & Schwenk, 1996),
there are very few studies that relate board composition to firm internationalization. In this
study, we attempt to fill this empirical gap by examining how the board of directors
influences the internationalization degree of the firm. In particular, relying on the Upper
Echelons perspective (Hambrick and Mason, 1984) we suggest that an organizational
outcome like internationalization can be partially predicted from directors background
characteristics. Carpenter, Geletkanycz & Sanders (2004) and Finkelstein, Hambrick &
Cannella (2008) both pointed to the importance of extending upper echelons theory to boards
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of directors and to study the relationships between members characteristics and

organizational outcomes.
REVIEW OF THE LITERATURE
The Board of Directors
Board members, along with the TMT, reside at the strategic apex of a firm and are the
information processing center of the organization in its relationship with the environment
(Thompson, 1967). Originally, authors who invoke the Upper Echelons perspective argue that
the top management team is the `dominant coalition (Cyert & March, 1963). We argue that
the concept of the `dominant coalition should also be applied to the board of directors.
Directors can indeed be selected because they have access to resources to help the firm
execute the intended strategy (Pearce & Zahra, 1992). Outside board members can also
perform a linking pin role with other firms and governments to help their firm establish
foreign operations and strategic alliances (Pfeffer & Salancik, 1978).
Our study, by undertaking such examination, makes several contributions. First, by
analyzing the effects of directors demographics on an organizational strategic outcome (i.e.
internationalization), we extend the upper echelons model to include and integrate the board
of directors with the top management team and the CEO as an additional critical unit of
analysis. Second, we also contribute to the internationalization and diversity literatures by
proposing for the first time that international experience, functional background, age, tenure
diversity and government affiliation of the board of directors are positively related to firm
internationalization.
Finally, through accounting for the board of directors at the strategic apex of the firm,
we provide a broader picture of the power dynamics and strategic influence of all parties
involved in the strategic decision-making process of the corporation.
The Antecedents of Internationalization
Upper echelons theory (Hambrick & Mason, 1984) proposes that the experience,
values and personalities of executives greatly influence the interpretations of the situations
they face and, in turn, affect the strategic actions that they take.
Uncertainty is harmful since it obscures the organizations control of resources and
choice of strategies and obstructs day-to-day functioning. An effective handling of uncertainty
leads to power (Pfeffer & Salancik, 1978).
Resource dependence theory states that boards can be a mechanism to cope with
uncertainty through managing external dependencies (Pfeffer & Salancik, 1978) reducing
environmental uncertainty (Pfeffer, 1972) and decreasing the transaction costs linked to
environmental interdependency (Williamson, 1984). Hence, by having directors who serve to
link the organization with its external environment a board may act to reduce uncertainty.
HYPOTHESIS
Hypothesis 1. The international experience of directors will be positively related to
internationalization
Hypothesis 2. The diversity in the functional backgrounds of directors will be
positively related to internationalization
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Hypothesis 3. The average age of directors will be negatively related to

internationalization.
Hypothesis 4. The average tenure of directors will be positively related to
internationalization.
Hypothesis 5. The government experience of directors will be positively related to
internationalization.
METHODS
Sample
This study uses a longitudinal research design to examine directors diversity
attributes and firms degree of internationalization in 2001 and between 2005 and 2007,
respectively. The population includes the largest European and United States service and
industrial firms by market capitalization as listed in the Financial Times (FT) 500 Global
index of 2007. This sampling frame results in a total of 108 firms and 1,348 directors.
Measures and Analysis
The analyses use the dependent variable Degree of Internationalization, the
independent variables International experience, Functional background, Director age,
Director board tenure and Government experience, and the control variables Industry,
Organization age, Organization size, Board size and Degree of internationalization in 2001.
We obtain an individual measure per firm for each independent variable in 2001. Regarding
the dependent variable we obtain an individual measure per firm, which is the average of the
foreign sales between 2005 and 2007 divided by the total sales in the same period.
We use OLS linear regressions to test our hypotheses. Our model uses a cross-section
of firms. The time is fixed at 2001 for the independent variables and at 2005-2007 for the
dependent variable.
RESULTS AND DISCUSSION
Our study confirms the unanimous importance given both to international experience
and lower age for firm internationalization (Sambharya, 1996; Reuber & Fisher, 1997;
Tihanyi et al, 2000; Carpenter & Fredrickson, 2001; Carpenter et al, 2003; Magnusson &
Boggs, 2005; Lee & Park, 2006) within the board of directors unit instead of the CEO or the
TMT. It seems that international experience among directors reduces environmental
uncertainty and dependence. Directors with international experience apparently feel more at
ease when taking internationalization decisions. We also find that most foreign board
members also have international experience. Indeed, twenty percent of our directors are
foreign born and thirty nine percent of them have international experience.
Another consistent finding with the TMT literature is that functional background is not
related to internationalization (Tihanyi et al., 2000; Carpenter & Fredrickson, 2001).
Apparently, a diverse set of skills does not necessarily mean more network resources to firms.
Directors and executives today are more likely to cross the traditional functional barriers of
their original education.
Younger board age might be related to internationalization because of risk taking
behavior (Child, 1974; Vroom & Bernd, 1971) and to evidence relating age to performance
(Shore et al, 2003). Due to its continuous changing environment, the international arena
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seems to be better suited for greater strategic change, which in turn is associated with a
younger age (Wiersema & Bantel, 1992). Older directors might have a greater stake in
supporting the status quo as it reflects the strategies they adopted over the years.
Our study also supports the importance of higher tenure which is evidenced by two
other TMT studies (Tihanyi et al, 2000; Wally & Becerra, 2001). The time spent together as
directors of the same board seems to elicit better communication and group functioning. As
time passes directors have stronger networks and they feel a stronger commitment to share
them with their focal firms. However, this relationship deserves further research attention
since there is alternative evidence (Golden & Zajac, 2001) that points to a curvilinear
relationship between board tenure and strategic change.
The fact that both the lower age and higher tenure hypothesis were supported does not
constitute a contradiction. It appears that, for firms wishing to further increase
internationalization they need to have both a younger and more experienced board. This might
be achieved by lowering board age upon recruiting, extending the allowed periods of service
and possibly even limiting board service to a certain age limit.
As for government experience, previous studies have linked government experience of
directors to improved firm performance (Hillman et al 1999; Hillman 2000; Hillman, 2005).
Because this variable had not been tested in an internationalization context and with non-US
firms we did consider it had strong potential. Our hypothesis here was not supported probably
because prior research used stock market returns (Hillman, 1999), market and accounting
based measures (Hillman 2005) and their sample relied on firms in a regulated environment
(Hillman, 2000) where the influence of government experience can be more useful.
LIMITATIONS AND FUTURE RESEARCH
Comparing directors backgrounds in different periods of time could strengthen the
argument of diversity as an antecedent of internationalization. Another opportunity lies in
comparing the board of directors background to that of the CEO and the TMT. Do they
influence firm internationalization in the same way? Are boards of directors more important
in the decision of firms to expand internationally? Or, do the board and top management team
complement each other as it was suggested by Sambharya (1996) and Carpenter et al (2003)?
CONCLUSIONS
Following calls for empirical research of upper echelons theory to the board of
directors (Carpenter et al, 2004; Finkelstein, Hambrick & Cannella, 2008) we have tested the
relationship between board members international experience, functional background, age,
tenure, government experience and their firms degree of internationalization in a sample of
US and European firms. By accomplishing this we also integrate the board of directors unit of
analysis to the more widely researched CEO and TMT categories. Furthermore, using a
dependent variable like internationalization degree we extend the upper echelons-governance
literatures since many studies have contributed to these fields focusing on financial
performance variables like return on assets or profitability. Thus, analyzing the board of
directors unit can give us a broader picture of power dynamics and strategic influences of all
parties involved in strategic control and decision processes related to an important outcome
variable like internationalization.
Additionally, we shed light on the causality issue regarding board and TMT
composition which Sanders & Carpenter (1998) argued could be established both as an
antecedent or as a consequence. By controlling for the degree of internationalization in 2001
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we isolate the effect that directors might have in the study period. Thus, we believe that a
directors appointment can precede internationalization decisions.
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