CSj gets some best-practice advice from investors, regulators and governance professionals in Hong Kong on how to improve diversity on boards and deliver real change.

Earlier this month, a Qualcomm shareholder sued the company’s directors for failing to bring an African American onto its board, or into senior executive positions, while repeatedly showcasing their diversity efforts to the public. The lawsuit is one of three shareholder derivative legal actions filed recently in the US against the country’s technology giants. Other tech firms sued this month include Oracle and Facebook, on allegations similar to the Qualcomm suit.

This series of lawsuits has again put the discussion of board diversity under a spotlight. While board diversity has been a hot topic in the field of corporate governance for many years, and some companies have made progress in diversifying their boards over the past decades, businesses are now faced with increased pressure to move beyond verbal commitments and make incremental, measurable changes.

The pressure has also been seen in Hong Kong. In recent years, a minority of listed companies have taken actions to increase board diversity, but the majority still have a homogeneous board makeup.

‘Hong Kong is lagging behind in the discussion of board diversity. We have been talking about board diversity for a very long time, but not much progress has been made,’ says BlackRock Associate Zoe Lau, who is part of the company’s Investment Stewardship team.

For example, regarding gender diversity, which is the most visible aspect of diversity, among the 50 Hang Seng Index (HSI) constituent companies, women occupy just 13.7% of board positions in the second quarter of 2020, finds a report published by Community Business – a non-profit working to advance responsible and inclusive business practices in Asia. The report also highlights that 12 HSI companies have all-male boards. Both numbers have remained at a similar level over the past two years.

Hong Kong also compares poorly to other parts of the world. In the US, all Standard & Poor’s (S&P) 100 boards have at least one female director; women also make up 28.6% of the S&P 100 board compositions. The figure stands at 25.3% in Malaysia and 18.4% in Singapore. In India, nearly 16% of directors in the country are women.

In 2018, BlackRock, the world’s largest asset manager, stated publicly for the first time its expectation that companies in the US should have at least two female directors. BlackRock further published a commentary on its engagement approach to board diversity in January 2020, highlighting that diversity – and the inclusion of different perspectives – is a globally relevant feature of board quality and effectiveness. Ms Lau, whose work focuses primarily on Greater China, points out one of the main reasons that gender diversity has not improved on Hong Kong boards in recent years is that appointments are usually made from a small pool of female directors.

‘Many companies in Hong Kong agree that diversity is an important issue, but they also think the pool of potential female directors is very small and so there is a shortage of female candidates for board seats,’ Ms Lau says. This has resulted in certain female directors having longer board tenures on multiple boards. She believes that Hong Kong is ready for more women on boards but there continues to be a problem of inertia.

‘Why is the board always a boys’ club? This is really not a new problem. Companies that wish to reap the benefits of a diverse board need to reflect on their commitment to lead in the ongoing war for talent. Is there a tendency for the incumbent board to rely solely on its existing network when looking for new directors, thereby unconsciously excluding potential female candidates? Does the current mix of talent on the board allow robust discussions that can yield resilient decisions in our fast-changing world?’ Ms Lau asks.

Tightening the regulatory net

To break old habits, improve transparency and keep regulations broadly in line with international best practice, Hong Kong Exchanges and Clearing Ltd (HKEX) has introduced tougher rules on board diversity. Effective 1 January 2019, HKEX upgraded Code Provision A.5.6 to Main Board Rule 13.92 (or GEM Rule 17.104) requiring issuers to have a board diversity policy and to disclose the policy or a summary of it in their corporate governance reports. Issuers are also required to disclose any measurable objectives that they have set for implementing the policy and progress on achieving those objectives (see ‘What are the listing rule requirements?’).

Since May 2019, HKEX has also required companies seeking IPO listing with a single-gender board to come up with measurable objectives and a timeline to move towards a more diverse path – for example committing to nominating a woman to their board within two or three years.

‘We want to make board diversity an important discussion and we want a company to think about the type of board composition that works best for them,’ says Katherine Ng, Chief Operating Officer and Head of Policy and Secretariat Services of HKEX’s Listing Division.

Ms Ng says that she has started to see positive changes. ‘A lot of the companies might not have considered board diversity previously, but now it’s on their board agenda and they are performing a proper analysis of their board composition against their business needs. Ten years ago, board diversity may not have been on their radar.’

But for many board diversity advocates in Hong Kong, as they continue to see stagnation despite years of education and advocacy, a stronger push – for example imposing quotas for gender diversity on boards – has started to come into this discussion.

In 2003, Norway became the first European country to issue a law that requires corporate boards to include at least 40% women. Belgium, Italy, Germany and several other countries followed in its footsteps. In 2011, France also instituted a 40% quota for board diversity. At the time, women only comprised 10% of the country’s board members. Less than a decade later, the number has hit 43%, surpassing its original goal. No such regulation or legislation, however, has been implemented in Hong Kong.

Ms Ng points out that the discussion about whether quotas for gender diversity should be imposed to improve gender equality in Hong Kong should not solely be led by the securities regulators – this discussion should involve a much broader group of stakeholders. ‘Gender equality is a wider social issue and not just a company corporate governance or risk management issue. If you look at other jurisdictions, quotas have been imposed by legislation rather than as a listing requirement by the stock exchange,’ Ms Ng says.

Diversity is not just about gender

‘We all hoped that change would happen because it’s in the best interests of companies, but change hasn’t happened. So the question now is – do we need to force change because it’s not happening naturally?’ says Gillian Meller FCIS FCS, Institute President and Legal and European Business Director of MTR Corporation Ltd.

She expressed concern, however, about how any gender (or other) quotas on boards could be implemented. ‘If today we say that by 2025 we have to have 30% of women on boards, it would be a real challenge to get the right people on the right boards by that date. While there are plenty of ‘board-ready’ women in Hong Kong, you could end up with women getting appointed to boards just to put a tick in the box,’ she says.

Ms Meller also points out that quotas would only address one aspect of diversity. ‘It’s easy to talk about women because the statistics are out there, the research is out there. There’s no problem with this, you have to start somewhere, but it is important to remember that there are other aspects of diversity that are equally, if not more, important for some companies,’ she says.

She adds that there are many factors in addition to gender that may be relevant when considering board appointments – including family status, ethnicity, age, expertise and sexual orientation. She believes companies need to be asking themselves which aspects of diversity are most relevant to their business with a view to ensuring that their key stakeholders can be understood and their strategies can be supported by the board.

Ms Lau echoes this thought. She points out that the board director is not just an auxiliary role but part of the company’s structure for providing insights and the definition of diversity should be a reflection of the company’s latest strategy. ‘If there are many millennials using your company’s product right now, should you not have someone on your board who knows what they like? If technology is advancing your company’s supply chain, has it not become necessary to have someone with a relevant background on the board? These are all important areas to consider,’ she says.

Practical recommendations

Around the world, research continues to support the value of board diversity. Cass Business School in London surveyed 16,763 public mergers and acquisitions globally over 20 years, and found that boards with female representation of 30% or more outperform all-male boards financially. A recent study, based on six years of research on Australian companies, also found that companies with a female CEO have a higher market value by 5%.

In a pandemic-hit world, diversity has also become more and more important for companies. A report by McKinsey suggests that inclusion and diversity are critical for business recovery, resilience and reimagination after COVID-19. ‘Our research and the research of others suggest that when companies invest in diversity and inclusion, they are in a better position to create more adaptive, effective teams and more likely to recognise diversity as a competitive advantage. Meanwhile, other companies might struggle,’ the report states.

As an integral part of corporate governance, what other practical steps can regulators, professional practitioners and organisations take to improve board diversity in Hong Kong? Ms Ng says first and foremost, companies need to figure out what board composition works best for their business strategy and risk profile. ‘This is something that no regulator can help them with – it is a journey that they have to go through themselves,’ she says. She adds that HKEX has plans to start tackling listed issuers with single gender boards.

The culture of relying on personal networks to find potential directors is a major obstacle to improving board diversity. To tackle this, Ms Lau suggests that companies should make more use of third-party search firms to find suitable candidates. This incurs a cost, of course, but companies with an awareness of the benefits diversity can bring will see this as money well spent.

Ms Meller believes company secretaries can play a key role in promoting better board diversity. ‘Company secretaries are in a unique position, having a close relationship with both the CEO and the chairman. We can raise the board diversity issue with them, but also with their colleagues on the board and the management team. We can also try to promote a pipeline of women within the company,’ she says.

Ms Meller, as both a director and a company secretary, also believes that female directors can speak out as role models. ‘Female directors in Hong Kong should talk about their roles, encourage other women and be very visible as role models for women in the pipeline,’ she says.

A truly diverse board will include and make good use of differences in the skills, industry experience, family background, race, gender and other qualities of directors. With the right governance policy in place to manage diversity, these differences will be taken into account in determining the composition of the board and businesses can reap the benefits of keeping relevant in this age of new challenges.

Hsiuwen Liu



SIDEBAR: What are the listing rule requirements?

  • The Corporate Governance Code, Appendix 14 of Hong Kong’s Main Board Listing Rules (or Appendix 15 to the GEM Listing Rules), sets out a principle that the board should have a balance of skills, experience and diversity of perspectives appropriate to the requirements of the issuer’s business.
  • Effective January 2019, Hong Kong Exchanges and Clearing Ltd upgraded Code Provision A.5.6 to Main Board Rule 13.92 (or GEM Rule 17.104) requiring issuers to have a board diversity policy and to disclose the policy or a summary of it in their corporate governance reports. Issuers must also provide information on any measurable objectives that they have set for implementing the policy and progress on achieving those objectives (see Mandatory Disclosure Requirements L(d)(ii)).
  • Another amendment effective 1 January 2019 expands Code Provision A.5.5 to require disclosure in the circular to shareholders accompanying a proposed resolution to appoint an independent non-executive director (INED) of the process used for identifying the INED nominee, as well as how the proposed INED may contribute to the board in terms of perspectives, skills and experience, and also to board diversity.