The clock is counting down to 1 September 2013 when Hong Kong's new Corporate Governance Code provision on board diversity becomes effective. Rosie Halfhead, Programme Director, Diversity on Boards, Community Business, urges companies and company secretaries to seize this opportunity to demonstrate progressive and enlightened thinking that will be a catalyst for long- term positive change in the boardroom and beyond.
From 1 September 2013, listed companies will need to either comply or explain any non-compliance with
the new code provision in Hong Kong's Corporate Governance Code requiring them to have and report on a policy on board diversity. As a non-profit focused on corporate responsibility, diversity
and inclusion, Community Business is certainly hoping for more compliance than explanation. We are also hoping for what we are terming 'meaningful’ compliance. Namely, the development and implementation of focused and sustainable board diversity policies that are relevant for each individual issuer and that can be a catalyst for long-term positive change in the boardroom and beyond.
An increasing body of research points to the benefits of board diversity – greater innovation, increased creativity, better decision making, and more informed risk-taking are just some of those that are frequently mentioned. Since directors are compelled to make decisions in the best interests of their companies while taking the viewpoints of multiple stakeholders into account, it stands to reason that having a broad diversity of perspectives is preferable to what is commonly referred to as 'groupthink’.
Imagine a scenario where a group of like- minded individuals who have similar ages, backgrounds and experience need to deal with an unexpected, highly complex and/ or disruptive event that requires timely board guidance and decisions. They are likely to be in uncharted territory way beyond their comfort zone and may therefore be unable to foresee possible outcomes and consider how best to manage and mitigate the issues and risks involved.
At its simplest, a diverse board should be made up of the right people and should harness their unique and individual skills and experiences in a way that collectively benefits the company and the business. This approach may take time and effort, but companies that make this investment will undoubtedly reap the benefits. We are not yet there in Hong Kong. From research published by the HKICS last October (Diversity on the Boards of Hong Kong Main Board Listed Companies), we see that the 'typical Hong Kong director is male, aged 58, is an independent non- executive director and an accountant with experience in banking’.
The decision of Hong Kong Exchanges and Clearing Ltd (HKEx) to introduce a new code provision on board diversity was a bold and enlightened move for a market that, until recently, has been conservative, entrenched and, as noted above, male- dominated in its approach to board composition. Fortunately, combined with the impact of other recent changes to the Corporate Governance Code, notably the requirement for all boards to comprise one third independent non-executive directors (INEDs), mindsets are beginning to change. Companies need to look beyond the current stock of directors to find new blood. The code provision is not prescriptive and there is no such thing as a 'diversity standard’ or a 'right or wrong’ way. Nor are there any specific targets or quotas in place. In the spirit of Hong Kong and its free-market thinking, HKEx is deliberately leaving companies to define diversity in a way that is relevant for them.
Company secretaries are, and should be, at the heart of the changes underway. They can provide an effective bridge from the traditions of the past to a more modern and forward-looking 21st century. As HKICS President Edith Shih said in the foreword to the research report on the Significance of the Company Secretary in Hong Kong Listed Companies, published last November, what better way to add 'real, tangible value to an organisation... (than to) be seen to do so by our peers, our boards, the regulators and especially the shareholders of our company?’
Changes are made to the Corporate Governance Code on a regular basis, but the amount of publicity and attention given to the topic of board diversity is interesting. Perhaps because it is time
for Hong Kong to catch up with other jurisdictions around the world with a
little 'encouragement’ from the regulator? Perhaps because there is a real market desire to strengthen corporate governance and Hong Kong's competitive positioning as a listing destination? Or perhaps because in the boardrooms and corridors of power of Hong Kong's corporations, there is a growing realisation that diversity makes sense because it reflects the increasingly globalised economy and multicultural workplace, and therefore a diversity of background, thought and experience in the boardroom is essential to good business?
So, as a company secretary, legal counsel or other adviser, how do you get the boardroom diversity discussion underway? Demonstrating that you are aware of current thinking and best practice is a good place to start, combined with suggesting a concrete and practical course of action that makes sense for your company. Whatever approach you take, it is essential to engage with the board chairperson from the outset, as experience shows that this type of cultural change needs to be led from the top, even if the chairperson delegates the responsibility for follow-through to the nominations committee, CEO, company secretary or other executives.
A four-step plan for action
Having a considered and structured way to tackle the topic is preferable to an ad hoc, one-off approach. Here are four steps that reflect best practice from around the world and that can work across all business sectors. The steps are relevant for listed companies as well as any other type of organisation that has a board of directors.1. Starting the conversation
This entails looking at your business strategy and any diversity policies and processes that already exist; determining the level of diversity in your business; and reviewing your current board composition within this context. Questions to consider include:- Do we have any written policies on diversity or HR policies relating to equal opportunity and human rights? How do they/ could they apply to the board?
- To what extent do we want to use this opportunity to address/ align our company's diversity strategy with our approach to boardroom diversity?
- What is the make-up of our workforce today – how do we expect that to change in the near, medium and long term?
- Who are our key stakeholders and to what extent is diversity important to them, now and into the future (stakeholders can include shareholders, customers, partners, suppliers and other key influencers)?
- What skills are essential to our business for a meaningful policy and strategy on diversity?
- What board director attributes/ skills are most important to us? How do these reflect the current composition and skillset of our board?
2. Articulating the board diversity policy
This is a requirement of the new code provision if your company plans to comply. In writing your policy you will define what diversity means to your company and its board. It will also be an essential framework for action by your board, your executive and others as required. And it will be a declaration of intent to your shareholders and stakeholders and to the general public.
This is, therefore, an excellent opportunity to communicate and demonstrate considered, progressive and enlightened thinking that could set your company apart from its peers. It can also be a means to attract and retain customers and employees, as well as investors.
If you are doing this for the first time, it makes sense to start with the basics rather than over-promise, but your discussion with the board could lead you to 'think big’ even if you 'start small’. Having a vision for your approach to diversity and recognising that it will take time to achieve it is preferable to restricting the thinking to the bare minimum from the outset. If you need inspiration, there are many companies in the world that are already leading the way in diversity and being very transparent about their ambitions and their progress.
Ideally, your policy should make reference to your company's mission and values,
its approach to board nominations and appointments, the means by which it plans to measure board effectiveness, as well as specific timelines for implementation and what support structures are in place to help throughout this process.
3. Evolving your board
With a policy in place, you can now consider specific actions that will support your ambitions for board diversity. This is an opportunity to reconsider your nominations and appointments process, making sure that you have clear and transparent criteria and processes in place that align with your policy. It is also an opportunity to review how you recruit and how you can diversify your recruitment channels and seek external expert support in this process; and it is also an opportunity to develop director training and evaluation programmes and processes. Evolving the board does not only mean appointing 'new’ people, it can also be achieved through training existing directors. Questions to consider include: • What are our existing nominations and appointments processes? How effective are they? How do we know?
• Are our review panels diverse enough? How is our diversity policy communicated to them?
• How do we ensure that any third parties involved in our recruitment process (such as executive search firms) understand and act in accordance with our board diversity policy?
• How many candidates we have considered were previously unknown to us?
• How do we evaluate the impact from the training and education we offer to our board directors?
• Do we conduct regular board and/ or director evaluations? How are the outcomes of these shared and actioned?
4. Staying on track
Reporting is another requirement of the new code provision. It makes sense to plan this from the outset and put in place mechanisms that will help a reporting process as well as a tracking and monitoring process to enable long-term, sustained progress. Where possible, include specific goals and targets; as the old adage goes 'you can’t manage what you don’t measure'. Objectives can be measured through procedural and structural objectives (for example setting up internal review and reporting procedures or a diversity committee, etc); targets (for example specific diversity characteristics that you have identified as priorities for future board composition such as language skills, geographical experience, gender, age, etc); and dedicated initiatives or programmes (for example awareness training for directors on relevant diversity topics).
You may have a mix of measures that you track internally within the board along with others that you will include in your corporate governance reporting for your shareholders and the general public.
As with any new initiative, it will be important to agree how you plan to review progress and evolve your strategy and plans as necessary. Consider how often this should happen, who should initiate it and who should be involved in the process.
New frontiers for the company secretary
Those advising board chairs, including company secretaries, can play a visible and influential role in encouraging relevant and meaningful board diversity. This should not be a box-ticking or cut and paste exercise to simply 'comply’ with a new requirement. This can be opportunity to plan for and influence change within a boardroom that has a real impact on the company's organisational and business models and ultimately on business performance. For company secretaries who aspire to contribute more to top management activities (as suggested in recent research) then we would suggest that board diversity is certainly a new 'frontier’ topic to embrace. It offers a unique blend of corporate governance, regulatory change and best practice – which can only play to the strengths of the 21st century corporate secretary.
Rosie Halfhead
Programme Director, Diversity on Boards, Community Business
Community Business is a non-profit organisation whose missionis to lead, inspire and support businesses to improve their positive impact on people and communities. As a thought leader in corporate responsibility in Asia, Community Business conducts research, facilitates events and networks, leads campaigns and provides consultancy and advice. Its major areas of focus include: corporate responsibility strategy, diversity and inclusion, work-life balance and community investment. Founded in 2003 and based in Hong Kong, Community Business works with leading organisations across the Asia region. For more information, visit www. communitybusiness.org.
The HKICS reports mentioned in this article (‘Significance of the Company Secretary in Hong Kong Listed Companies’, and 'Diversity on the Boards of Hong Kong Main Board Listed Companies’) are available at the 'Publications’ section of the HKICS website (www.hkics.org.hk).
SIDEBAR: Board diversity guide
On 18 April this year, Community Business released a 'how to’ guide that offers practical advice to help companies formulate a relevant board diversity policy and to create the right environment and mechanisms for impactful and sustainable implementation that delivers tangible business benefits. Improving Governance through Board Diversity is based on Community Business’ considerable knowledge and experience of diversity that is derived from many years of working with companies who are leading the way in diversity and inclusion. This article reflects the thinking in the guide which is available to download in English and Chinese at: www.communitybusiness.org/DOB.
