Consider gender diversity on boards for its economic value, and realise that the external disclosure of a firm’s diversity and inclusion policies can be a value generator. 

The need for greater gender diversity of boards in Singapore has emerged as a topic of debate. While women are generally better represented at senior management level in Singapore compared to many countries in the world, the number of women directors on boards is low, at just over 8 per cent.

Much of the public debate has focused on whether legislating quotas is the right way to increase gender board diversity.

Good corporate governance supports strong capital markets. Rather than debating whether quotas are the right way to increase the number of women on boards, should companies step back to understand the economic benefits of having more diverse boards and workforces, and focus on enhancing external disclosure of their initiatives?

Diversity and inclusion are no longer the right things to do; they are a business imperative for both boards and CEOs.

Gender is one of the diversities open to boards and should be considered for its economic value. Studies have shown that gender diversity on boards contributes to more robust decision-making, governance and shareholder value.

Credit Suisse’s recent report, The CS Gender 3000: Women in Senior Management, shows companies with greater board gender diversity display excess stockmarket returns. In Asia Pacific, the compound excess return since 2005 of companies with a market capitalisation of less than US$10 billion with at least one woman on the board on a sector-neutral basis was 55 per cent.

CEOs also view diversity and inclusion as critical for the growth of their companies. PwC’s 16th Global CEO Survey highlighted that workforce diversity and inclusion is the top non-financial priority of CEOs after ethical behaviour, with 50 per cent of global CEOs focusing on this within the next 12 months.

Global best practices to increase board diversity are varied.

Most jurisdictions are actively raising the number of female board directors. Practices to increase board gender representation vary, and include governance code and regulatory requirements (for example, the United Kingdom, United States, Australia, Canada), as well as quotas in a number of European markets and India.

MORE DISCLOSURE

In the area of greater disclosure, the Australian Stock Exchange recommends that companies include, on a comply or explain basis in their annual reports, details on a company’s diversity policies, measurable objectives for achieving gender diversity, achievements against these objectives, and information on the proportion of female employees in the entire organisation, in senior positions, and on the board of directors. The UK Code of Corporate Governance also recommends similar disclosures.

In Singapore, Guideline 2.6 of the Code of Corporate Governance states that “the Board and its board committees should comprise directors who as a group provide an appropriate balance and diversity of skills, experience, gender and knowledge of the company”.

A review of the latest annual reports of the 30 constituents of the Straits Times Index indicates that only half the 30 companies have one female director each. One company has three female directors out of 11.

While some companies disclose information on their employee profiles and diversity policies in their sustainability reports, the information on how boards seek to promote board diversity is limited.

However, disclosure of diversity policies is just a matter of time.

One of the recommendations of the Diversity Task Force is for regulators to place more emphasis on the importance on gender diversity in the Code of Corporate Governance and SGX’s rules.

Why have a diversity policy and talk about it?

Having a diversity policy in place should not be viewed as just a disclosure compliance requirement. In addition to showing that companies promote fairness and equality, it helps companies to meet stakeholder requirements.

Investors, regulators and other market participants increasingly emphasise the need for board gender diversity (as part of a broader view of board diversity) and greater transparency of related initiatives.

In the US, shareholders have been known to ask for more diverse candidates to be included in the pool of candidates for board positions.

Disclosing a diversity policy allows companies to differentiate themselves given:

  • The business imperative. Numerous studies show that diverse companies financially outperform their less diverse counterparts. Employees in a diverse company are more likely to see their company capture a new market or improve market share.
  • The need for talent. Tapping multiple resources means more access to a high-quality talent pool for companies, something which CEOs in Asean view as the biggest potential inhibitor to growth. As globalisation continues, and technology disrupts industries, leveraging innovative and diverse talent is crucial.
  • Improving efficiency and talent retention. PwC research indicates that 85 per cent of millennials in Asia consider an employer’s diversity and equality record when deciding whether or not to work for a company. With a growing number of millennials in the workplace, disclosure of diversity policies will become a must when attracting and retaining employees – in particular, women.

GLOBAL BEST PRACTICES

Disclosure of board and workforce diversity policies is in line with the principles of Integrated Reporting (IR), an initiative to provide insight about the resources and relationships used and affected by an organisation. IR is about moving to a more aligned understanding of the interplay between financial and non-financial factors.

Investors increasingly consider non-financial risks, such as human resource issues, when assessing organisations. Disclosure is also in line with the Global Reporting Initiative G4 Sustainability Reports Guidelines which recommend reporting indicators on employment, diversity and equal opportunity. Evidence suggests that companies with superior performance on corporate social responsibility (CSR) strategies are rewarded with greater access to finance, and may be valued more highly by investors.

Communication of diversity and inclusion policies supports the creation of value for those companies which embrace this. Is this an initiative your company should adopt?

 

Original article published on 31 October 2014 by Business Times.

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