Closing the Fortune 500's emerging markets gapJune 5, 2013: 6:42 AM ET
Here's what companies really need to do to grow in emerging markets.
By Dominic Barton
FORTUNE -- If you truly have your eyes on the prize, then you deploy your best people and biggest investments against that goal.
But are executives really putting this truism into practice? McKinsey & Company studied the performance of more than 1,600 U.S. companies over a 15 year-period (1990-2005). Most companies doled out roughly the same amount of capital to business units as they did the previous year -- and cruised forward in low gear as a result. By contrast, the most aggressive re-allocators -- companies that shifted more than 56% of their capital across business units over that period -- delivered 30% higher total returns to shareholders.
In short, getting this right is easy to say and hard to do. But it matters bigtime.
Now ask almost any global executive a second question -- What's the biggest prize out there today? -- and capturing emerging markets growth would surely rank at or near the top. Here's how McKinsey sizes this particular prize: By 2025 consumption in emerging markets alone will surpass $30 trillion as some 3 billion new members of the consuming class come online. Just 440 cities in emerging markets alone will account for nearly half of global GDP growth over that period.
But once again, there's a mismatch between awareness and action. Today, while 38% of global GDP comes from emerging markets, companies headquartered in advanced markets on average earn only 17% of their revenue from these countries.
Interestingly, one place multinationals might turn for the executive talent and management mindsets that could help begin to address this problem: the rising generation of emerging markets champions themselves. Companies headquartered in emerging markets are growing twice as quickly in wealthy countries as their rivals who are based in advanced economies and 2.5 times faster in emerging markets. And the main reason, it turns out, is because they are reallocating capital more aggressively into tomorrow's high-growth businesses.
Is there an opportunity to get more of that risk-taking, growth-focused executive DNA into multinationals? Yes. For the recent issue of the Fortune 500, we ran an analysis of the previous year's board composition using an emerging markets lens. As it turns out, only 57% of companies in the Fortune 500 have even one board member from an emerging market (broadly defined as someone with either emerging market citizenship or extensive education and work experience in those countries). Overall, only 9% of board members of Fortune 500 companies met this cut.
It's not just about boards, of course. In our experience, we've seen a number of companies experiment successfully with a range of organizational initiatives aimed at ensuring that their leadership teams reflect the growing importance of emerging markets. Some global consumer products companies have relocated business units, core functions, such as R&D, and in rare cases their headquarters to emerging markets. We have also seen large, international financial services and natural resource companies build advisory councils to their boards that have a deliberate skew toward emerging markets, in order to capture that expertise. Clearly closing our collective emerging markets gap requires far more than pulling one lever.
But as we have learned in other areas, diversity really matters, as does the tone from the top. "It's a big problem," as one senior business leader told me recently, "that while most of my growth is in emerging markets, my management is not from emerging markets." He's right. And since that's the case, moving faster to recruit more board members and senior executives from emerging markets seems like a good place to start.