CGj reviews a new HKCGI research paper, published in collaboration with KPMG China in May 2023, addressing key challenges and practical considerations for organisations seeking to improve the diversity of their boards.
Hong Kong lags behind many other developed jurisdictions when it comes to board diversity. This goes beyond gender of course – ethnicity, age, expertise, experience, skill sets and knowledge are all very relevant aspects to be considered – but gender diversity is a highly visible aspect and is therefore a good indicator of how far companies, and indeed jurisdictions, have progressed in embracing the benefits of greater diversity. According to Hong Kong Exchanges and Clearing Ltd (HKEX) data, 16.8% of directors of listed companies in Hong Kong are female. This compares with the global average of 30% female participation on boards.
Improving the diversity of the boards of Hong Kong listed issuers has been a focus of HKCGI work for over a decade. Working alongside and in partnership with other advocates of improved diversity, equity and inclusion (DEI) in Hong Kong, the Institute has been broadening awareness of the benefits of good DEI policies and practices.
The Institute’s latest initiative is a research paper, published in collaboration with KPMG China– The Transformative Power of Diversity – Regulatory and Practical Considerations for Boards (the Report). It provides useful recommendations for companies seeking to improve their performance and reporting in this area.
The case for improved diversity
The benefits of having more diverse, but also more inclusive, boards are more widely recognised today. A diverse board ensures that different perspectives are explored in board discussions, leading to more informed business decisions and better management of risk.
Regulatory regimes around the world, including in Hong Kong, have been tightening the rules in this space, but there is a limit to how far regulations can encourage the adoption of a DEI culture. The rules can focus on whether organisations have a good diversity profile – for example having a good representation of different genders, ages, ethnicities and expertise among directors – but the other two components of DEI are just as important. To really get the benefits of greater diversity, organisations need to consider how far their culture is equitable, in terms of ensuring the fair treatment of all individuals, and inclusive, in terms of listening to and encouraging diverse viewpoints.
Moreover, adopting a DEI culture helps build a more positive corporate image and helps to improve a company’s relationship with key stakeholders. ‘Increasingly, access to capital is linked to diversity. Major investors have exercised their voting rights to vote down proposals because companies lack diversity. Diversity, therefore, has become a stakeholder-responsive governance issue,’ the Report says.
Investors are not the only stakeholders taking an interest in companies’ approaches to DEI. In a recent KPMG survey, 80% of customers reported that they prefer brands that are aligned with their social values. ‘These findings suggest that organisations must closely examine their existing values and assumptions. Further, they emphasise that addressing ESG concerns, including diversity and inclusion, is no longer “nice to have” but rather a fundamental governance and risk management issue,’ the Report states.
The push factors
In addition to the incentives discussed above, the current operating environment for listed companies includes many push factors for improved DEI. First among these, of course, is the rapidly evolving regulatory regime in Hong Kong. Regulatory compliance is a basic requirement for companies and the Report highlights a number of changes to Hong Kong’s rules in relation to diversity. These include:
- no single-gender boards are permitted for IPO listing applicants
- all existing ‘single gender’ board issuers need to appoint at least one director of a different gender by 31 December 2024
- all listed issuers need to have a diversity policy and boards need to review the implementation and effectiveness of these policies annually, and
- all listed issuers need to disclose and explain the company’s gender ratio in the workforce (including senior management), the company’s plans for setting measurable objectives on gender diversity and any foreseen challenges to achieve these objectives.
The Report comments that the need to include directors’ gender information now reads ‘male/female/non-binary/others’. This, it points out, is a step in the right direction to recognise broader DEI issues.
In addition to the above, HKEX has also been improving the transparency around listed issuers’ diversity profiles. In April 2022, it launched a new repository (Board Diversity & Inclusion in Focus), available on its website, which publishes detailed data tracking the diversity performance of listed companies.
As mentioned above, investor expectations is another push factor companies should take into consideration. In this context, the Report discusses the influence that proxy advisers now have on diversity issues.
‘Proxy advisers are influential and many investors listen to them,’ it points out. ‘Specific directors, including the nomination committee chair, could face criticism if they do not have a diversity plan or proposal in place. Sometimes the net can get cast even wider with votes against other resolutions. This is a potent tool that proxy advisers and investors use against directors that don’t align with their values. As such, there is a need for companies to consider how to strengthen stakeholder communications. Enhancing stakeholder communication on diversity issues is an essential aspect of investor relations.’
The Institute’s latest research Report, in keeping with the remit for such reports, focuses on providing practical suggestions on how organisations can best achieve the benefits of greater diversity. Indeed, the starting point for the Report was the need to provide answers to questions on board diversity raised during a recent HKCGI/KPMG seminar on this topic.
1. The role of training
As with any transformative change, one of the key challenges for organisations seeking to benefit from greater diversity will be changing the mindsets of individuals throughout the corporate structure. The Report points out that training and knowledge sharing will be an important part of achieving this. Boardroom training, for example, should highlight the key local and international trends relevant to diversity.
‘Companies should try to share the current trends regarding diversity, including where international and local regulations are heading, what investors are looking at and what the company’s peers are doing. The key is to get this discussion on the board agenda,’ the Report says.
2. Expanding the talent pool
A key first step for many organisations will be expanding their talent pool to include candidates who might formerly have been considered to be outside the profile of a typical director.
This point is made by one of the Report’s contributing authors, Edith Shih FCG(CS, CGP) HKFCG(CS, CGP)(PE), Past International President, Honorary Adviser to Council and Institute Past President, and Executive Director and Company Secretary, CK Hutchison Holdings Ltd. She points out that organisations can benefit from widening their recruitment net to include potential directors who have worked across various sectors and job types and who are gender, age and ethnically diverse.
‘It is normal for listed issuers to look for accountants, lawyers or bankers to create diversity,’ she says. ‘But how about if we look farther out – what about sales and marketing experts, academics and scientists? Diversity means thinking outside the box to enable companies to expand beyond their traditional horizons.’
3. Using a board matrix
Another practical suggestion made by the Report is to use a board matrix to identify diversity gaps to fill. It points out that this simple tool can improve the efficiency of organisations’ diversity planning.
‘The names of the directors and their corresponding personal details, along with contributions to committees, skills and expertise, are checked off on the board matrix. The company can then holistically consider if there are any gaps (unchecked boxes) and seek to fill them with suitable board candidates. The parameters could be tweaked to suit the requirements of the particular listed issuer. For example, different issuers may have various committees requiring special skills and expertise, which can be built into the board matrix,’ the Report says.
4. What numerical targets and timelines should companies be aiming for?
The Listing Rules in Hong Kong currently require issuers to set numerical targets and timelines for gender diversity, but no indication is given of what might be deemed appropriate. One participant at the HKCGI/KPMG seminar that launched the Report asked what specific numerical targets and timelines issuers should be aiming for.
The Report points out that, if issuers are starting from zero, their target should be appointing their first female director. It adds, however, that issuers shouldn’t stop there. In one recent example cited by the Report, a prominent female director was the only woman on a board and found it difficult to get her perspectives across. This became easier as more female board members were appointed.
‘Thus, it is ideal to progress from ending a single-gender board to having more than one woman on the board, eventually reaching the target of 30% or more,’ the Report says.
What lies ahead?
Both the pull and push factors driving better corporate diversity continue to exert influence in boardrooms around the world. Companies in Hong Kong can expect a further tightening of the regulations intended to increase board diversity in the years ahead. In the Report, Katherine Ng, Head of Listing, HKEX, says ‘There is still much more work to be done. ‘We are committed to driving change through our regulatory efforts, as well as through ongoing market education and advocacy.’
As mentioned above, regulators are not the only stakeholders companies should be considering, however. Board diversity issues continue to attract the attention of shareholders, employees and customers, and companies that fail to address diversity issues do so at their own peril.
‘The key message should be that governance topics such as diversity are no longer “nice to have” and not about minimum disclosures under corporate governance reports. Instead, they are essential to the overall business strategy,’ the Report says.
The Transformative Power of Diversity – Regulatory and Practical Considerations for Boards is available on the HKCGI website (www.hkcgi.org.hk) under Thought Leadership/Research Papers.
The Institute is grateful to Andrew Weir, MBE JP, Senior Partner, Hong Kong (SAR) and Vice-Chairman, KPMG China, together with his team, and Edith Shih FCG(CS, CGP) HKFCG(CS, CGP) (PE), Past International President, Honorary Adviser to Council and Institute Past President, and Executive Director and Company Secretary, CK Hutchison Holdings Ltd, for their contributions to the Report. The Institute also thanks Ernest Lee FCG HKFCG(PE), Institute President; Katherine Ng, Head of Listing, Hong Kong Exchanges and Clearing Ltd; and Alva Lee, Partner, Head of Governance, Risk & Compliance Services, Hong Kong, KPMG China. Ellie Pang FCG HKFCG(PE), Institute Chief Executive; and Mohan Datwani FCG HKFCG(PE), Institute Deputy Chief Executive, assisted in drafting the Report.