Why an independent director is crucial to embracing internationalism

International expansion is one of the most complex procedures a growing business can go through: could hiring a good independent director be the key to success?

Of all the strategic issues faced by boards of growing companies , internationalisation is one  of the most complex and tough to deal with. Internationalisation affects almost every company, everywhere, boards of directors must understand the international business environment, the forces of internationalisation and globalisation and how these impact on their business.

1 Exporting Perhaps the oldest form of internationalisation, this is a relatively low-risk option in terms of financial commitment and may have less impact on the organisational activities of the firm.

2 Licensing Licensing allows other firms to use the licensor’s intellectual property, such as patents and trademarks, in their own business in exchange for a fee.

3 Distribution agreements Companies can also enter into agreements with local partners to distribute products and services.

4 Franchises These allow use of the company brand in exchange for a share of the profits, and are good ways to minimise financial risk and have a low impact on the franchising organisation. Restaurants and hotel chains often use the franchise model to expand both domestically and internationally.

5 Joint ventures These are the most popular mode of entry into the emerging markets. Partnering with a local firm gives foreign companies quick access to markets, supply chains and resources, and local partners can also help with regulation and provide access to key people such as regulators or politicians. Volkswagen famously used joint ventures with local firms to establish itself early in the Chinese car market, and went on to dominate that market

6 Greenfield investments Sometimes also known as wholly-owned investments or ventures, these involve the company replicating its domestic operations in some form in another country, setting up its own production and/or distribution and marketing operations.

>See also: Launching a business in another country

7 Acquisitions This is another popular way to establish a physical presence in an overseas markets. Acquisitions are quicker than greenfield investments, and if handled properly will yield a faster return on investment. However, acquisitions can be problematic and many fail to deliver value.

8 Brownfield investments This is a variant on the acquisition, in which a firm is acquired and heavily restructured and reformed to make it ‘fit’ into the acquiring company.

Identify your strategy

Identifying which of the above is the most appropriate strategy is highly important .My book The Independent Director uses case studies from my career portfolio to illustrate all the above points as well as revealing where the failure to develop the right strategy led to a badly planned and unprofitable expansion which in turn led to the downfall of the company

What do  directors  need to know about internationalisation  in order to be successful? First , there is the simple awareness of difference. Recipes for success in one market will not necessarily work in another. Transferring a brand from a home market, where it is well known, to another market where there are incumbents in place and where your own brand is unfamiliar is not an easy thing to do.

Cultural differences mean that managing people can be a very different experience, national cultural differences can have a profound impact on everything from market demand to management and leadership styles.

Does the country you wish to enter have a strong or weak economy? If the latter, there may be a strong middle class with lots of spending power; in the latter, personal spending power may be weak. Less strong economies may also be more subject to exchange rate fluctuations, or to have legal barriers impeding the inflow and outflow of capital. Political systems differ too.

Does the country have a business-friendly government, or one that sees business as potentially a threat to its own sovereignty? Different regulatory regimes – or their absence – may pose challenges for corporate governance. Issues such as bribery and corruption, unknown in one market, may suddenly rear their head in another where the rule of law is less strong and regulations are not enforced.

Board Directors need to bear all of these things in mind when looking at any proposed international expansion.

What business the company is in also affects how it manages international expansion. For example, at NovaQuest Capital a private equity fund  we are facing a number of challenges as we grow our funds under management. One of the questions that faces us is, do we need to have people on the ground in various geographies, or would it be better to work through partnering.

>Related: Opia expands into Russian markets with Yondex deal

Getting these decisions right is not easy; many other private equity funds have tried to go global and have failed.The same problems affect the retail business, where no one seems to have found the right organisational recipe for international expansion. WalMart has probably come closest, but giants such as Tesco and Marks & Spencer have failed badly, particularly when attempting to enter North America

Critical implications for the board

All of these challenges in taking a business international  have implications for the board, and underline the critical need for the effective independent director. If boards cannot manage an international strategy successfully, then either there is something wrong with the strategy or something wrong with the board.

One of the common causes of failure in this field is for boards to decide on a strategy and then plough steadily on, regardless of the mounting evidence that the strategy is not working. Non-executives, from their independent perspective, can take a longer view, see the signs of success or failure, and let the board know when they think a change of course might be called for.

Chief executives should not, make strategy on their own. They need the wisdom and experience of independent directors to help them find the right way forward. Especially they need chairmen and non-executives who have experience of international business and can help guide their thinking. The experience of these directors and chairmen is valuable in a number of  ways.

First, their knowledge of other countries and markets can help the board as a whole decide what countries it wants to be in – or not be in – and the best strategy for effecting market entry. Second, they can help the Board to decide which areas are best suited for international expansion. Third, they can help the board to understand market developments and customer behaviour.

Their experience of international competition can also be invaluable in helping the board to understand what competitors will do next and what threats they might pose. International competition is no longer something that only happens to companies that go overseas. Increasingly, Chinese and Indian companies are coming to us and competing on our own home soil.

An Indian business group, Tata, is now the largest manufacturing employer in the UK. Times have changed, and there are few if any companies in the world that are not vulnerable to international competition. To conclude ,Independent Directors have a critical role to play not just in corporate governance but in increasing shareholder value and especially in helping companies to grow successfully internationally

The Independent Director: The Non-Executive Director’s Guide to Effective Board Presence by Gerry Brown is published by Palgrave.

Further reading on global growth: The power of collaborative growth

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.