Date: April 23, 2018
First published in Straits Times on 23 April 2018
Firms’ performance v equality; quotas v free market approach
The recently announced Asean Corporate Governance Scorecard 2018 for Singapore must have been disappointing to some observers not just because it showed that the development of overall corporate governance practices here has essentially flatlined, but also that progress towards achieving gender diversity has also been minimal.
While 37 per cent of the 100 Singapore companies provided detailed and measurable diversity policies, only four reported on the progress on achieving those objectives. Worse, six in 10 had no women directors and three in 10 had only one. One has to wonder if the Diversity Action Committee’s target of having 20 per cent of listed company boards occupied by women by the year 2020 is realistic.
The issue is important because a number of studies suggest that greater gender diversity leads to better company performance, prompting calls for official intervention to boost female numbers. Management consultants McKinsey & Co, for example, has performed exhaustive research to demonstrate this, stretching back to their Women Matter: Gender Diversity – A Corporate Performance Driver report in 2006, which found that companies with a higher proportion of women on their management committees were also the companies that had the best performance, and that the link between gender and performance was statistically significant.
“Companies in the top quartile for gender diversity in their executive teams were 21 per cent more likely to have above-average profitability and 27 per cent more likely to have industry-leading performance on longer-term value creation than companies in the bottom quartile,” reported McKinsey in a recent update, adding that companies with the most ethnic and culturally diverse executive teams are 33 per cent more likely to outperform their peers on profitability.
Credit Suisse in its 2016 Higher Returns With Women In Decision-Making Positions reported the same pattern of superior returns when more women were in top positions.
“A key message from our 2014 study, The Credit Suisse Gender 3000: Women in Senior Management, was that gender diversity or the greater representation of women in senior roles was not just ‘nice to have’ but linked to excess stock market returns and superior corporate profitability. As we re-run our dataset for 2016, we find those investors focusing on those companies where gender diversity is an important factor in their strategy continue to be rewarded with excess returns running at a CAGR (compound annual growth rate) of 3.5 per cent,” said Credit Suisse.
By the same token, however, studies which are arguably more academically rigorous indicate that companies perform no better or no worse when they have women on their boards. In her May 2017 Does Gender Diversity On Boards Really Boost Company Performance?, Wharton University management professor Katherine Klein summarises some of the academic studies into the topic, including Post & Byron’s Women On Boards And Firm Financial Performance: A Meta-Analysis from the Academy of Management Journal vol. 58 no. 5 in 2015; and Does Gender Matter? Female Representation On Corporate Boards And Firm Financial Performance – A Meta-Analysis by Pletzer, Nikolova, Kedzior & Voelpel in the Public Library of Science, also in 2015.
“The results of these two meta-analyses, summarising numerous rigorous, original peer-reviewed studies suggest that the relationship between board gender diversity and company performance is either non-existent (effectively zero) or very weakly positive,” wrote Prof Klein.
“Further, there is no evidence available to suggest that the addition, or presence, of women on the board actually causes a change in company performance. In sum, the research results suggest that there is no business case for – or against – appointing women to corporate boards. Women should be appointed to boards for reasons of gender equality, but not because gender diversity on boards leads to improvements in company performance.”
Prof Klein offers a few possible explanations for these findings, one being that women named to corporate boards may not in fact differ very much in their values, experiences, and knowledge from the men who already serve on these boards, because both male and female board members are likely to be selected for their professional accomplishments, experience and competence.
“Even if the women named to corporate boards are different from the men on these boards, they may not speak up in board conversations and they may lack the influence to change the board’s decisions. When individuals are minorities, tokens, or outliers in a group, they often self-censor, holding back from expressing beliefs and opinions that run counter to the beliefs and opinions of the majority of the group,” noted Prof Klein.
So as things stand today, although there is some evidence of superior company performance with more women on the boards, this is not definitive. There is, however, an argument to be made from a gender equality perspective, but like many other areas relating to company conduct, there are no easy answers to the question of what should be done.
On the one hand is the argument that without official quotas the number of women directors will always remain small and so official intervention is seen as a must. On the other hand is the counter argument that regulatory intervention amounts to tampering with free market forces and may even end up impeding women’s interests.
Some women leaders, for example, argue that quotas can have unintended consequences, for example, women who are appointed may not know if they are there on merit or whether they are there simply to satisfy a quota. Shareholders would expect quality on their boards which can only be achieved by appointing directors with the relevant experience and training or background, and not just based on gender. Nevertheless the imposition of a mandatory quota begs the question whether there are enough women with relevant experience to fill that quota?
Singapore prefers the free market approach but as noted earlier, the numbers are low.
Themin Suwardy and Gopalakrishnan Surianarayanan from Singapore Management University in their Reframing The Board Diversity Issue: Set 25 by 25 Target recommended setting a goal of 25 per cent by 2025 and suggested encouraging government-linked companies (GLCs) to lead the way, pointing out that Austria requires all state-owned enterprises to have at least 25 per cent female representation, while Greece, Portugal and Taiwan ask for one-third. Elsewhere, France, Ireland, Norway and Luxembourg require 40 per cent.
This setting of quotas for GLCs is certainly worth considering if regulators here are serious about bringing about useful, material advances in gender equality. However, claims that this should also lead to better performance should be approached with caution.
David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)
