Many female readers of this journal will no doubt have had the experience of being the only woman present at board meetings. How would they pitch to their male colleagues the need for better board diversity? CSj outlines a fictional company secretary's defence of diversity.

The board chairman called the regular meeting of the board of directors of Roosters Ltd to order at 11:00am. The meeting agenda was swiftly dispatched in the usual manner, but just as the directors were ready to break for their traditional post-meeting lunch, the company secretary, the only woman present, asks whether the board should consider the issue of board diversity. There follows a stunned silence. Not only has this question never been asked before, but the assembled directors have clearly never even heard of this newfangled concept. Standing in between the directors and their collegial lunch, our company secretary has to explain why board diversity should at least be on their meeting agenda. Company secretaries interviewed for this article believe her pitch should include the following.

Why diversity matters

1. Stakeholder expectations

Stakeholders around the world have become increasingly vocal in their demands for better board diversity. This can be seen, for example, in the 'lively’ debate in the social media about Facebook's all-male board. 'Shareholder advocacy is increasingly on the rise and investors are proactively calling on companies to diversify their boards of directors,’ says Daniel Lin, a Managing Partner at Grant Thornton Hong Kong. Shalini Mahtani, Founder and Director of Community Business in Hong Kong, adds that simply staying in touch with the concerns of the company's stakeholders is a lot easier where the board's composition reflects those of its major stakeholders. 'In the realm of basic business performance, 60% of consumer decisions are made by women,’ she points out, 'so if women are the primary decision makers for consumer goods then a mono-ethnic, single gender board will be out of touch with the market.’ This point is seconded by Peter Greenwood, Group Executive Director of Strategy for CLP Holdings. 'It makes every sense if the board of a company is a reasonable reflection of the characteristics and interests of the key stakeholders in the company,’ he says. 'It is obviously advantageous that the board is in tune with the people with whom the company interacts. At CLP, we are providers of a public service, so the board should be highly aware of and understand the interests and concerns of the society we serve.’

2. A question of talent

Some 48% of Hong Kong's labour force are women and 56% of university graduates are women. For Shalini Mahtani, the maths is very simple. 'If you want to have the best people, you must include women,’ she says. Greenwood agrees: 'It's in the interests of the company and the shareholders to make the fullest possible use of the wide range of talent on a company's board, rather than deny a company and shareholders access to this talent with an unfairly narrow focus on board members,’ he says.

3. Better decision making

Non-diverse boards are also in much greater danger of descending into 'group think’ than boards with a good mix of perspectives. 'A diverse board enhances decision making,’ says Peter Greenwood. 'And diversity comes in many shapes and forms; it's not just gender, it's age, experience, ethnicity, countries where people reside and countries where they have worked. The real advantage of diversity of the board is that all those different characteristics lead to more thought-provoking and rewarding positions and decision making.’

Caricature or portrait?

Is Roosters Ltd a caricature of the typical Hong Kong board? Yes and no. When compared with other markets in the Asia Pacific region, Hong Kong is certainly no laggard in terms of board diversity. The city is China's most cosmopolitan and internationalised urban centre which helps improve the ethnic mix on its boards. Moreover, Hong Kong ranks third in the Asia Pacific region for female representation on its boards. This sounds like some kind of achievement until you learn that this high ranking has been earned even though, according to Governance Metrics International's (GMI) 2012 Women on Boards Survey (available at www.gmiratings.com), women make up just 9.4% of Hong Kong directors. Moreover, our fictional scenario of the lone female company secretary advising an all male board is not particularly far fetched when you consider that, according to the same GMI study, some 40% of Hong Kong companies don’t have a single female director. The numbers get even worse when you look at listed companies. Of the 48 companies listed on the Hang Seng Index, 20 don’t have any women directors. Only China Resources Power Holdings Company Ltd has a female chair and Hang Seng Bank Ltd has a female CEO. Elsewhere in the region the numbers paint an even bleaker picture. In Japan barely 1% of directors are women. Even the region's best performer on gender diversity – Australia – has only managed to raise the proportion of women on its boards to the not-so-stellar heights of 13.8%. Outside the region, the picture is hardly more encouraging. According to GMI, the global average for female directors is currently 10.5%, and the pace at which gender diversity is improving is glacially slow – the proportion of women on boards globally increased by 0.7% in 2011.

Are mandatory quotas the answer?

The response of regulators and governments to this issue varies enormously around the world. Currently, there are no requirements in Hong Kong relating to board diversity. Some jurisdictions at the other end of the spectrum have opted for mandatory quotas. Malaysia, for example, recently introduced a 30% quota for the senior management of publicly listed companies. Should Hong Kong impose mandatory quotas for board diversity? Elspeth Renshaw, Partner, Talent Partners, believes that while many business leaders, politicians and academics are conflicted over the question of quotas, there can be no doubt that they work. ‘The question always raises thorny issues around merit and whether there are sufficiently qualified women to take seats at the boardroom table. However, the evidence that quotas work is there already.’ The latest GMI statistics do indeed indicate that, where gender quotas have been imposed, the number of women board members has instantly accelerated. Norway imposed a 40% quota for women on boards in 2003 and now has the world's highest female representation at the executive level (36%). France's National Assembly passed a law in 2010 requiring French boards to have 20% female composition within three years and 40% in six. Now the percentage of female representation in France has reached an all time high at 16.6%. Renshaw points out that while quotas are generally not supported at the time of their introduction – even in Norway, for example, unionists and women's groups were opposed to the quota – they quickly become accepted and uncontroversial. Argument over? Well, not quite. The GMI statistics also show that nonmandatory measures can also accelerate the momentum towards better board diversity. Australia, for example, decided against imposing quotas, but has required listed companies to report on their diversity policies and performance. Australia is second only to France in the pace at which it is adding women to its boards – the increase in female directors last year was 3.5% and 5.4% over the last two years. Most respondents to this article are opposed to quotas. 'They are mechanistic and formulaic,’ says Peter Greenwood of CLP. Daniel Lin of Grant Thornton believes diversity is chiefly a matter for self-education. 'While many countries have set quotas for gender representation on boards and have brought about a marked change with speed, organisations and shareholders should also be pro-active about increasing diversified representation and do this with genuine drive. At the heart of the matter, businesses need to understand why diversity makes business sense. Regulators can play a conducive role but this is insufficient without companies knowing the true value of business diversity on board representation,’ he says. The diversity issue is certainly on the radar screens of regulators here, but, given Hong Kong's generally laissez faire approach to the market, quotas are unlikely anytime soon. More likely will be something along the lines of the approach taken in Australia and the UK where listed companies are required to report on diversity. The UK has revised its corporate governance code (the changes will apply on or after 1 October 2012), to require listed companies to include in their annual reports a description of the 'board's policy on diversity, including gender, [and] any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives’. The annual evaluation of boards is also to be extended to include an assessment of the diversity of board members which includes gender criteria. The chairman of a UK listed company will be required to act on the results of these evaluations and address any weaknesses of the board by, for example, proposing new members to be appointed. The latest revisions to our corporate governance code in Hong Kong, which took effect last month, have taken tentative steps towards an obligation to report on board diversity. The code now includes a new provision requiring nomination committees to review the structure, size and composition of the board at least annually (emphasis added). Daniel Lin believes that one of the considerations of the 'composition’ of the board will be diversity. He adds that, companies will have to disclose any lack of compliance with this code provision in their corporate governance report. Peter Greenwood believes this is the right approach for Hong Kong. 'It would not be right for the Exchange to be a social engineer and specify requirements; it seems preferable that the Exchange promotes an approach whereby companies should report what their diversity policies are so others, including their shareholders, can judge whether these meet their expectations,’ he says.

The company secretary role

Given the fact that board diversity is not, yet, a regulatory compliance issue in Hong Kong, can company secretaries safely ignore the issue? The HKICS has been arguing for some time that company secretaries need to be more vocal on issues relevant to their role as 'counselor, adviser and a thought-provoker for the board’ as Peter Greenwood puts it. The Institute believes that board diversity is precisely the kind of issue where the company secretary can add value. Firstly, in terms of gender diversity, the gender balance in the profession is actually tipped in favour of women – some 64% of the Institute's overall membership (members and students) is female and 73% of the Institute's students and new graduates are female. Secondly their unique vantage point on the board means that company secretaries see first-hand the benefits of bringing in fresh perspectives to board discussions. What then, can company secretaries do to encourage their boards to address this issue?

1. Ensure the board is properly advised

Perhaps the most obvious first step is for company secretaries to ensure the issue is on the board's agenda. 'Company secretaries act as gatekeepers to the board and their duties include providing professional recommendations to the board and management. They can help promote a diversified board,’ says Daniel Lin. Peter Greenwood points out, however, that the chairman's role is also critical here. 'I think that in this era company secretaries can support, prompt and promote effective boards if a company secretary has a good relationship with the chairman and can bring to the chair's attention the importance, advantages and investor expectations of opening the board,’ he says.

2. Look beyond the usual suspects

On a more practical level, company secretaries can also encourage a better diversity of board candidates through their involvement with the director recruitment process. Elspeth Renshaw of Talent Partners believes that the biggest obstacle to better board diversity is the persistence of the 'old boy's network’ in the director selection process. 'The patrician elite clubs (sporting, social and legal circles) appear to be the likely source of a board appointee rather than a thorough search and selection process,’ she says. Teresa Ko, the China Chairperson of Freshfields Bruckhaus Deringer, agrees. 'The old boy's network is still very much alive in Hong Kong,’ she says. But she also points to the so-called 'leaky pipeline' phenomenon. 'The more senior the management rank, the more women get left behind due to a variety of reasons – they drop out due to lack of sponsorship, or for a change of lifestyle, or because of an institutional or individual mindset that does not support the advancement in women,’ she says. She stresses that there needs to be a change of mindset and an internal commitment within companies to have more women on boards. 'In Hong Kong, you don’t get a gold star for putting women on boards and you don’t get a black rabbit not doing so. There is no disclosure of board diversity required anywhere – I am not counting photos of board directors in annual reports – and leaving it to current board members to fill ad hoc vacancies tends to result in more men being appointed.’ Company secretaries can help broaden their company's selection criteria for board directorships. 'Companies should review their existing criteria for eligibility and see if it is too narrow and not tapping the range of qualities and background experiences that will lead to better decision-making and problem solving. It is apparent that boards need to be able to call on the knowledge and expertise outside of the traditional corporate sectors,’ Daniel Lin says. One way of achieving this is to use a professional board search firm. 'The advantage of using an executive search consultant is that they tend to have a structured and well-tested methodology, and may have a broader range of known candidates than those that may be in the immediate field vision of the chair and current board,’ says Peter Greenwood. He cautions, however, that the desire to have a better diversity of board candidates needs to be made explicit to such firms. 'An executive search consultant is only as good as the instructions he or she is given. If a company wishes to broaden from a narrow base, that instruction must be made clear to the consultant,’ Greenwood says. Gina Miller and Kieran Colvert Gina Miller is a Hong Kong-based journalist. Kieran Colvert is the Editorial Director of Ninehills Media and the editor of CSj. The GMI '2012 Women on Boards Survey’ can be found at www.gmiratings.com. The HKICS hopes to release the findings of its current board diversity research project later this year.    

SIDEBAR: Food for thought

‘if women are the primary decision makers for consumer goods then a mono-ethnic, single gender board will be out of touch with the market’ Shalini Mahtani, Founder and Director of Community Business in Hong Kong ‘it makes every sense if the board of a company is a reasonable reflection of the characteristics and interests of the key stakeholders in the company’ Peter Greenwood, Group Executive Director of Strategy for CLP Holdings ‘regulators can play a conducive role, but this is insufficient without companies knowing the true value of business diversity on board representation’ Daniel Lin, Managing partner of Grant Thornton Hong Kong ‘the old boys network is still very much alive in Hong Kong’ Teresa Ko, China Chairperson of Freshfields Bruckhaus Deringer 'the patrician elite clubs (sporting, social, legal circles) appear to be the likely source of a board appointee rather than a thorough search and selection process’ Elspeth Renshaw, Partner, Talent Partners  

SIDEBAR: Board diversity: the bright as well as the right thing to do?

If, as this article argues, there are clear and unambiguous advantages to having a more diverse board, you would expect to find empirical evidence that board diversity improves company performance. There have been many studies to date that have looked at the relationship between gender diversity and company performance, and, sure enough, many of them have found a positive correlation between the two. ‘Looking at data from 2007 to 2010, McKinsey established that gender-diverse boards out-performed their competitors by 40% using an average return on equity for comparison,’ says Elspeth Renshaw, Partner, Talent Partners. 'The same data was used to establish that the same companies had a 55% higher EBIT margin [‘Earnings Before Interest and Tax’– a measurement of a company's operating profitability]. An older piece of research completed in 2001 involved almost 20 years of data and concluded that 25 Fortune 500 firms with significant evidence of promoting women to executive level roles showed between 20% to 70% higher profitability than the median Fortune 500 firms in same industry.’ For Shalini Mahtani, Founder and Director of Community Business in Hong Kong, bringing more women and increasing ethnic diversity into the boardroom is not about women's rights or affirmative action, it is about driving profitable growth and enhancing performance. 'It's a simple equation’, says Mahtani, 'more diversity on the board results in better return on investments, on capital and on sales.’ There has been a research project in Hong Kong – Female directors and earning's quality, by Professor Judy Tsui of PolyU and Professor Ferdinand Gul of CityU – which found evidence to back this claim. 'The presence of female directors in monitoring positions on audit and corporate governance committees makes for more transparent reporting and earnings quality. There is evidence that boards with female directors promote greater vigilance over financial reporting, exhibit greater independence of thought and ensure a more rigorous monitoring process... This study finds significantly higher earnings quality in firms with female board participation,’ the study states. As with other contested theories about improving corporate performance, however, there is data to back both sides of the argument. Elspeth Renshaw concedes that 'while there is evidence of a correlation between gender distribution on boards and overall profitability, this evidence is contested and controversial.’ Daniel Lin, Managing Partner, Grant Thornton, Hong Kong Ltd, believes that in the short term, greater diversity on the board may actually reduce board cohesiveness. 'In some instances, diverse boards may underperform against homogenous boards where individuals are more likely to disagree thereby weakening the team consensus. This may result in slower action and responses to the ever-changing business environment during boardroom meetings. But this is believed to be only a short-term effect, which is outweighed by longer-term benefits of diverse board with diverse perspectives and skills,’ he says.  

SIDEBAR: What the numbers say: the global picture

 

SIDEBAR: What the numbers say: a tale of two markets