Commentary: Board diversity: More needs to be done

Date: January 6, 2021

First published in Business Times on 6 January 2021

Singapore companies risk being sidelined as they fall behind on gender ratio

The United States tech exchange Nasdaq has proposed new listing rules that, if approved by the Securities and Exchange Commission (SEC), would require all its listed companies to publicly disclose consistent, transparent diversity statistics regarding their boards of directors.

“The goal of the proposal is to provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective,” said Nasdaq in its press release.

Nasdaq-listed companies will be required to disclose board-level diversity statistics within one year of the SEC’s approval of the rule. They will also be expected to have one diverse director within two years.

Depending on which listing tier a company occupies, it will then have to appoint one more diverse director within either four or five years.

Companies must have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an under-represented minority or LGBTQ+ (lesbian, gay, bisexual, transgender and questioning).

Foreign companies and smaller reporting companies have the flexibility of satisfying this requirement with two female directors.

The move is significant for companies from this part of the world as there are currently 226 Asian companies listed on Nasdaq.

It is also important to note that Nasdaq has chosen to define “diversity” beyond gender.

In Asia, the diversity debate so far has focused solely on gender. Undoubtedly, it will in time encompass non-gender-based criteria.

From the Securities Investors Association (Singapore) (Sias)’s viewpoint, the issue of diversity is complex and there is no one-size-fits-all solution. Some experts argue that trying to engineer change through gentle persuasion and by trying to convince companies to move beyond all-male boards is a futile exercise because of an entrenched “old boys network” that prevails in many areas of society, and that progress is only possible via mandatory requirements.

Others argue that the overriding consideration has to be hiring the right person for each job, and selection of directors has to be based on merit. Taken to the extreme, this school of thought believes that forcing companies to hire more women directors does women everywhere an injustice and is a backward step.

Adding value

Both sides have a point but what is not in doubt is that having more diverse views and expertise on boards adds considerable value to companies and, ultimately, shareholders. Nasdaq supported its move by referring to an analysis of over two dozen studies that found an association between diverse boards, and better financial performance and corporate governance.

Here in Singapore, a board gender diversity study carried out by Professor Lawrence Loh of NUS’s Centre for Governance, Institutions and Organisations (CGIO) in 2017 found that the proportion of women on boards was statistically significant in improving the corporate governance scores of Singapore-listed companies.

This was particularly so for female independent directors. This increase in corporate governance scores in turn translated into higher return on equity ratios for the companies.

Sias has long been a champion of more female board participation. Diversity at the board level results in more robust decision-making, stronger corporate governance, a reduced likelihood of group-think and better returns for investments.

A gender-diverse board also better understands the perspectives of its female customers and workforce, and creates positive role models for other women executives to advance upwards. This results in a stronger management team.

Given the ongoing Covid-19 pandemic it is worth asking: Do Singapore boards have the necessary knowledge, skill and expertise to navigate the worst crisis in a generation? Is there sufficient diversity in thinking at the top echelons of the local business world to ensure survival?

Answering this conclusively is difficult but what is clear is that more can be done. According to a 2018 Deloitte study “Women in the Boardroom”, the percentage of board seats held by women in Singapore was only 13.8 per cent – far behind developed Western nations. Norway’s proportion is 41 per cent, New Zealand’s is 31.5 per cent, and Switzerland’s is 18.4 per cent.

It has to be pointed out, however, that in Norway’s case, companies have to abide by a mandatory 40 per cent guideline.

In this region, Malaysia leads with 20.6 per cent, followed by Thailand with 14.2 per cent, then the Philippines with 13.7 per cent. There has been some progress in Singapore – in 2015, the percentage of board seats occupied by women here was only 9.1 per cent – but that progress has been slow.

Singapore companies must take a hard look at their boards and examine the value brought to the table by each member. When appointing new directors, the board should publicly articulate why those persons were selected and the exact value they can add. It would also be helpful to have new appointees state the contribution they expect to make to the organisations they are joining.

The nominating and governance committee, as well as individual directors, must be willing to go beyond existing relationships to consider integrating less familiar candidates.

As gender gains use as a proxy for cognitive diversity and future business performance, then it follows that companies here risk being less well regarded than competing investments in a global marketplace if they fail to act.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)