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Taking Steps Toward Greater Board Diversity

As Hong Kong corporates become more international in profile and investor base, HKEX Head of Listings Bonnie Chan says their board diversity should reflect long-term business needs and goals.

Board diversity has become a critical factor in business resiliency, sustainability and long-term financial performance. The positive results of diversity are so well established that investors are demanding that corporates achieve greater diversity to enhance risk management and drive profitability.

A host of evidence supports the notion that a diverse company is naturally more innovative, intuitive, and resilient than a homogeneous one. Diversity improves a company’s ability to listen to and understand its stakeholders. Diverse companies are also better at attracting and retaining young talent.

Gender diversity is often a good place to start because it is easily measured, objectively quantifiable and straightforward in terms of disclosure, compliance and enforcement. Gender diversity is also globally comparable, and this reveals Hong Kong’s current shortcoming.

As of November 2020, only 12.7% of Hong Kong listed companies’ directorships were held by women. By comparison, women hold 34.4% of directorships in the UK, 28.2% in the US, and 19.5% in Singapore. Mainland China is only slightly better than Hong Kong at 13%.

Jurisdictions have taken different approaches to implementing greater board gender diversity, from legislation requiring a certain percentage of board seats be held by women, to market regulation. However, success in implementing diversity essentially comes down to corporate culture and a desire to change.

The global pandemic has sparked appetite for change and transition, and this has created the ideal conditions to address corporate governance, and board diversity in particular. Hong Kong Exchanges and Clearing (HKEX) is committed to guiding and supporting issuers as they realise the long-term, sustainable benefits of greater board diversity.

Change agent

As a regulator, exchange operator and a corporate, HKEX sees itself as a change agent, and we are leading the drive on board diversity in Hong Kong. About 800 out of the more than 2,500 companies listed on the exchange have single-gender boards, illustrating the task ahead of us.

HKEX first introduced diversity requirements about eight years ago. Since January 2019, all issuers have been required to disclose their board diversity policy, making Hong Kong the first jurisdiction to mandate such a policy.

HKEX has long been conditioning issuers to embrace these changes. For example, by providing an online Director Training Programme covering board diversity, and issuing detailed Guidance for Boards and Directors on the topic. We also host an annual Boardroom Insight event to promote board diversity.

The most recent development was HKEX’s April consultation paper on the Corporate Governance Code and Corporate Governance Report. It proposes to put an end to single-gender boards, with a three-year transition period for existing issuers. The aim is to enhance board independence, promote board refreshment and succession planning, and strengthen the role of the nomination committee while also promoting board gender diversity.

Diversity beyond gender

The addition of women to the boardroom is not a silver bullet, but it can be the beginning of deep rooted and much needed cultural change within an organisation.

The boardroom should be a place for robust debate, new ideas and teamwork. This requires diversity in perspective, which is driven by factors ranging from nationality to ethnicity, professional background and training, age, and sexual orientation.

Periodic board refreshment can also foster diverse perspectives, new ideas and business strategies. Differing perspectives break down the tendency towards ‘group think’, and this can be particularly important among family-founded companies that rely on a tight-knit inner circle of advisors and board members.

One of the focuses in the recent consultation is long serving Independent Non-executive Directors (INEDs), and the risk that while familiarity can be valuable, the longevity of the relationship may also result in complacency and a lack of robust critique.

Many Hong Kong-listed companies have relatively homogenous boards containing members in the same age bracket with similar professional backgrounds, with a heavy emphasis on law and accounting. However, most modern businesses require other expertise as well, such as technology and crisis management, which allow companies to swiftly and successfully to respond to data security breaches, pandemics, and political conflict.

Finding new members

Increasing the diversity of a company’s leadership takes time and effort. It is also not just the preserve of the chairman or the nomination committee to drive diversity. Existing board members can also help by suggesting individuals and looking outside the tried and tested pools of directors.

Other options to help achieve greater diversity include offering potential candidates the opportunity to serve on sub-committees which can allow companies to get to know candidates before they are nominated to the board. Providing new board members with a mentor and sponsor on the board also improves integration of new members.

Recruiters in Hong Kong say they are compiling growing lists of qualified women executives who are seeking their first board seat. The biggest hurdle is for candidates to get the first board position, as companies often request board experience, creating a ‘Catch-22’ situation.

A good candidate has experience leading a regional or international business, and governance, financial and change experience is highly valued. However, there is increasing demand too for technology expertise at the board level, and human resources skills and reputation management skills have both become more valued factors.

People who want to serve on boards can improve their profile by serving on charity boards, or becoming active in professional organisations. Joining executive training programmes, such as the FT Non-Executive Director Diploma, also helps prepare people for board positions.

Since 2017, HKEX has offered the Director Training Programme, with e-training materials that provide existing and potential directors with practical advice and guidance to help them stay informed and relevant in the ever-changing business environment.

Time for change

Board diversity is an important factor in business resiliency and long-term sustainability. This is increasingly reflected in the engagement priorities of investors, many of which are setting targets for investee companies.

At HKEX we want to help companies enhance their businesses by embracing greater diversity. Our market consultation on improving corporate governance is another step forward in delivering on this ambition.

Now is the time for Hong Kong corporates to embrace change and ensure that the diversity of their board reflects their long-term business goals, creating companies and communities that serve the needs of all stakeholders.

The author would like to thank to Russell Reynolds Associates and Leathwaite

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