Importing Oversight from Abroad
Foreign directors matter most where legal institutions are weakest, and when they come from countries with stronger ones.
Boards increasingly cross borders. But which firms actually recruit foreign independent directors, and do those directors help? This research studies both questions in a large sample of non-U.S. firms.
On the demand side, foreign directors appear where you would expect: at firms with more foreign operations and a more international shareholder base. Supply matters too. They are more common in countries with a limited pool of qualified domestic candidates, places with smaller and less well-educated populations and less developed capital markets.
The performance results carry the sharper lesson. The association between foreign directors and firm performance is most positive in countries with weaker legal institutions, and when the director comes from a country whose institutions are of higher quality than the firm's own. Oversight, in effect, can be imported.
For global investors and boards, the message is that a director's passport is not a detail. The institutional quality of both the home and the host country shapes what a foreign director contributes.
The Takeaway
Firms in weak-institution countries benefit most from foreign directors, particularly directors arriving from stronger legal environments.