Roy Lo, Deputy Managing Partner, Shinewing (HK) CPA Ltd, and Gloria So, Manager, Shinewing Risk Services Ltd, discuss ways to enhance corporate performance through board diversity.

T here has been considerable discussion globally about the value of diversity on corporate boards. The general consensus is that board diversity forms an important part of the initiative to enhance corporate governance standards. Governments and exchanges around the world have been increasingly promoting board diversity in recent years either by legislation or by voluntary, or 'comply or explain’ based, regulation.

International trends

In the US, the Securities and Exchange Commission requires public companies to disclose if diversity has been considered during the board nomination process. In the UK, listed companies should explain the board's policy on diversity in the annual report that describes the work of the nomination committee. In Singapore, the Code on Corporate Governance stipulates that the board and board committees should comprise directors who achieve appropriate balance and diversity in terms of skills, experience, gender and knowledge of the company.

The new provision set by HKEx

In view of this global trend, Hong Kong Exchanges and Clearing Ltd (HKEx) also introduced in 2012 amendments to the Corporate Governance Code to include measures to promote board diversity. The Code states that issuers should formulate policies relating to board diversity and should disclose their policies, or a summary of their policies, in their corporate governance reports. This recommended best practice has been implemented since 1 September 2013, aiming to enhance board effectiveness and corporate governance.

Gender and age

The gender and age of board members are explicit indicators of diversity. As seen from the figures provided by HKEx, the total number of directors sitting on the boards of Hong Kong issuers as at 31 May 2012 was 13,397, of which 1,380 were women, representing only 10.3 percent of the board members of all issuers. Some 40 percent of listed companies have no female directors on their boards. Moreover a majority of directors, amounting to 67 percent, fall between the ages of 41 and 60, and the average age of directors is 53.2 years old.

A broad definition of diversity

In fact, diversity encompasses more than simply gender and age. It includes many elements including professional experience, educational background, skills, race and nationality, etc. Listed companies should consider many different diversity criteria and develop their own policies and disclosure systems based on the nature of their businesses and practical needs.

Better decision-making

In general, board diversity collectively benefits the organisation and the business as a whole. People with different qualifications, experiences and cognitive approaches on the board are likely to offer a wider range of perspectives and solutions to corporate issues. Creativity and innovation could also be cultivated during the discussion process, resulting in effective decision-making in the boardroom.

Strengthening networks and relations

A diverse board would also find it easier to connect with a wide range of stakeholders including customers, suppliers, investors and employees across gender, age and cultural orientation. The board would have a better understanding of multiple stakeholders’ opinions and could more actively respond to their needs and concerns. This allows the board to identify more new opportunities or risks for the company and retain better relations with various stakeholders.

Access to the widest pool of talent

A corporation which adopts an effective policy would select or promote the best talent solely based on their capabilities, regardless of other factors. This would favourably promote higher productivity and efficiency and stimulate employees’ loyalty and belonging.

Enhancing corporate image

By working proactively to improve diversity and aligning with international practices and standards, a corporation could demonstrate its commitment to equality and progressive management, which would substantially help to enhance its corporate image.

Developing a diversity plan

The value of board diversity should not be underestimated. It is worth considering the following points when devising your board diversity plan.

• Form a working group or committee involving those key members in the company who would be responsible for establishing diversity policies, monitoring the processes and making timely and accurate disclosure.
• Review your board composition regularly, evaluate the competencies of existing board members, and examine and fill any gaps.
• Set a comprehensive training programme for directors, incorporating different knowledge areas and skills essential to your specific business needs to help build individual and collective strengths and improve areas of weaknesses.
• Establish proper nomination procedures and criteria adopted by the nomination committee or the board members regarding recruiting and recommending the most suitable candidates for directorship.

Moving forward

As the need for board diversity is increasingly appreciated in the business world, more women will take up directorships. However, gender equality is not the only issue. Certainly, more women nowadays are equipped with higher educational qualifications and professional skills and increasing numbers of them will be selected to join boards, but parity with men should not be blindly advocated. We believe more emphasis should be placed on the combination of capabilities and skills when addressing the issue of board diversity; these factors will have a more direct influence on corporate performance. Roy Lo, Deputy Managing Partner Shinewing (HK) CPA Ltd, and Gloria So, Manager, Shinewing Risk Services Ltd The authors can be contacted at: sw-risk@shinewing.com.hk.