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Who do China CEOs report to?5/12/2016
To operate at their best, global cross-border companies require clear and effective regional-reporting lines for senior leaders. This is particularly true for multinational companies (MNCs) operating in China given the country’s size and complexity as a market, as well as its outsized importance as a source of revenues and future growth.
Yet determining the best reporting-relationship structure is a tricky proposition. Indeed, a Heidrick & Struggles survey finds that companies in the region choose a range of reporting structures for their China heads. Although respondents are largely satisfied with their current chains of command, those who see a need for change overwhelmingly cite structures that give the China leader a more direct line of sight to global leadership and the CEO.
Who we surveyed
These are among the findings of a survey of 100 senior executives in the Asia Pacific (APAC) region who oversee or are deeply involved in their company’s operations in China. The survey, part of an ongoing research project to study the China market,1 examined the various reporting-line models employed by MNCs and how well these function. Roughly 90% of our respondents were from American, European, or Asian MNCs headquartered outside China. Respondents hailed predominantly from companies in the industrial, consumer, technology, and healthcare sectors, with nearly half providing goods or services to both China and overseas markets.
In terms of scale, 70% of the respondents’ companies reported worldwide revenues last year of more than $3 billion, and 80% of the organizations have been established in China as either wholly foreign-owned or joint-venture entities for more than 10 years.
How significant is China?
Close to 40% of the respondents reported that China revenues represent 10% to 30% of their company’s total global earnings, while nearly six in ten said China contributes more than 40% of their Asia Pacific income (Figure 1).
This importance is underlined by the fact that 42% of respondents say that their company’s China leader sits on the global executive committee, or its equivalent.
Who reports to whom?
As Figures 2 and 3 show, while half of China heads report to the head of Asia/APAC, 26% of the companies surveyed have flipped this structure, as their China leadership also oversees Asia/APAC operations.
However, nearly 30% of respondents said their company’s China boss reports directly to global leadership (either the CEO or the global head of a business unit).
From the responses to our survey it seems there are a variety of reasons why some MNCs do not give their China heads oversight of operations in the Asia/APAC region. The most commonly cited—by 65% of respondents—was the desire to avoid diluting the focus of the company’s China leadership.
While 44% of respondents said that the company’s China leadership may not be the best qualified to lead the entire region, 26% said the proportion of regional revenue generated by China is not large enough to justify such a reporting structure.
Of those companies that have put their China leader in the regional driving seat, 57% noted the fact that the country makes up the majority of their Asia/APAC revenues, and just over 28% said it was because of the effectiveness of their China heads in this role.
Will reporting structures change?
Although 44% of the respondents surveyed said their reporting structures had been in place from the start of their company’s involvement in China, 69% said it was unlikely these would be changed in the coming two to three years.
Yet we saw a striking pattern among the 17% of respondents who indicate that a change is likely. Notably, every one of these respondents was in an organization where the China head currently reports to the Asia/APAC head, and every one said their company plans to switch its reporting line to a more direct connection to global leadership.
Among the reasons given for this change are the need to acknowledge China’s status as a strategic market, the belief that direct communication between China and global headquarters will be more effective, and the fact that it is time consuming and cumbersome to package the needs of China and the rest of the region together.
Sorting out the challenges
Despite only 17% of respondents anticipating changes in their company’s reporting lines within the next two or three years, fully 29% of those questioned aren’t satisfied with their company’s existing structure.
In other words, fully 12% of respondents think they have suboptimal reporting lines, yet report no plans to amend them.
Digging deeper, we discovered a range of factors driving decisions on whether or not companies plan to change or retain reporting lines. For instance, we found that issues of cost, communication, and organizational efficiency are often cited by respondents as disincentives to establishing direct reporting lines between China and headquarters.
Moreover, some respondents said their companies want to avoid duplicating costs, for instance, in their finance and product-design departments. Based on forecasts, other respondents indicated that China revenues will not yet have reached sufficient scale to justify such independent status within the next two to three years. (Figure 4 shows how surveyed executives characterized their company’s current China revenues as a proportion of overall Asia Pacific revenues.) Still other respondents observed that their global headquarters has too little understanding of China to add value through direct input.
Conservative corporate culture was another factor cited by respondents as inhibiting change, as was the shortage of local talent capable of taking up leadership roles for China and Asia/APAC.
Such findings are consistent with our experience in the region, where many of the top MNC executive roles in Asia are still filled by expats and the localization of senior leadership remains a challenge. This is partly due to the high turnover rate of talent in Asia, and partly because of the weaker communications skills of some local executives, who may not have enough “global savvy” or an expansive enough perspective to interface with headquarters effectively. Still, after more than two decades of development there is a pool of qualified local MNC leaders in China, and the best companies have had development programs in place for some time. These often involve the recruitment and integration of employees overseas before reassigment to Asia and periodic overseas rotations to help burgeoning leaders develop their internal networks.
In the longer term, these issues can be addressed with training and through opportunities to gain a broader range of experiences. In fact, for some leaders who have spent their careers operating only within the specific demands of the Chinese market, the opportunity to work abroad can be particularly eye-opening. Those multinationals who prioritize cross-cultural training and exposure will reap the benefits of having a local Chinese leadership that is more prepared to engage with the global CEO in terms of strategic thinking.
About the author
Seth Peterson (email@example.com) is a partner in Heidrick & Struggles’ Hong Kong office.
1 For more, see Seth Peterson, "What China’s 'new normal' means for multinational companies," Heidrick & Struggles, September 28, 2015.