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Language and Corporate Governance.

September 19, 2013 Leave a comment

A study recently made by the Research Institute of Industrial Economics, and authored by Rebecca Piekkari, Aalto University, Finland, addressed the topic of internationalization, the corresponding language switch in board meetings, different language capacities by directors in different firms or countries, and the effects these differences generate on governance and decision-making processes in the researched firms.

It is first outlined the fact that many international  firms, even if they have reached export levels upper than 80%, still had boards dominated by nationals of the country where the firms were founded. Secondly, the author remarks that internationalization gives firms access mainly to foreign commercial (talent,  customers, supplies) and financial goods, (stock exchanges, funds), but it doesn`t always enhance shareholder returns. Why?

The paper focuses on three items:

a)     How internationalization affects board processes: when locals where not prepared to language diversity, boards tended to be less interactive, and more silent decision-making dominated the scene.

b)     Diversity as it affects processes.

c)      Language in multinational corporations.

We will mainly focus in the first subject, in how the author explains the effects on board processes stemming from the hiring of a foreign director increasing language diversity.

The research was done in nine multinational Nordic firms. In these countries, since 2000 and until 2007, the share of foreign directors increased, but only to around 15%.

The case is made differently between well-prepared companies, where English was adopted in a timely manner, and not-prepared ones, which simply changed to English without delay nor preparation.

Well prepared firms adopted English only after board materials had been switched to English for a certain time; they also had very language capable managers in their ranks; in some cases, English was the standard language used by employees, as determined by company manuals. These companies did not generally suffer in their board processes.

The unprepared firms found that their local non English-speaking directors were prevented from active and normal participation by this barrier, interaction in the board became lower, and the board meetings themselves were also shorter. Directors in these firms stated they felt discomfort in the meetings, difficulties in expressing their ideas, and less willingness or eagerness to participate, as a result. In particular, directors found difficulties in expressing disagreement, and in debating. Another effect refers to the inability of foreign directors to socialize after meetings, when local language dominated the scenario again.

As a conclusion, authors recommend to adopt a timely transition to English (or any other dominant language in the board), if discussions and decision-making processes are to be kept rich and efficient respectively.

On the other hand, the research also reflects that firms with dominantly financial internationalization are more likely to adopt English, as English native directors are hired to obtain confidence among the community of investors. But this is not so general in the commercially internationalized: this process of exporting or investing abroad seems to be sufficiently difficult, so that companies try to avoid adding a new problem: language diversity and board process and decision problems entailing from it!

Based on “The Role of Language in Corporate Governance: The Case of Board Internationalization”, published on 2013 by the Research Institute of Industrial Economics, and authored by Rebecca Piekkari, Aalto University, Finland.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2323616

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