Enhancing value via diversity, inclusion: A company’s value is much more than its reported “dollars” – leveraging its talent diversity makes business sense.
While corporate governance has continued to evolve over the past few decades, there is still room for further improvement. Companies continue to be focused on their financial results. Unfortunately, accounting standards have their limitations, as they don’t measure the value of all intangibles. And yet in many cases, intangible assets including its human capital make up over half of the value of a company. Studies have shown a correlation between a company’s human capital strategy and business performance.
In more recent times, there has been debate on how diversity can enhance a company’s corporate governance. In Singapore, unfortunately some view the words “board diversity” as “dirty” words.
Why? Most regard Singapore’s meritocracy as an integral part of its success, with many people identifying it as a core principle of governance in Singapore.
Others are focused on gender diversity, and view it as a Western issue. In the last 50 years, the achievements of women in Singapore have been outstanding. Unlike other countries, women in Singapore did not need to fight for the right to vote before it was given to them, and they were given equal right to education. Further, since 1968, working women have had legislated maternity leave, and since 1960 the Women’s Charter. As a result, in 2011 15 per cent of executive committee members in Singapore were women, higher than the Asian average of 8 per cent, European average of 10 per cent and the US of 14 per cent.
Unfortunately, at the end of 2014, the Diversity Action Committee reported that the level of representation of women on boards in Singapore was only 8.8 per cent, which was lower than the UK, Australia, the US and most parts of Asia.
However, diversity is much more than inherent attributes – the traits that you were born with, such as gender and ethnicity. Acquired diversity, which is becoming increasingly important, involves traits gained from experiences such as working in another country, which can help one appreciate cultural differences.
Why is diversity important?
Companies today face a number of uncertainties in global markets, particular from the digital revolution, which is forcing a basic rethink of business models. The need for transparency is increasing. Uncertainty and volatility is unlikely to diminish any time soon.
A key attribute for future corporate success is adaptability. This includes having a good mix of talent and the ability to alter the mix depending on business needs. It also means having people who can think and work in different ways and who can lead cross-functional, cross-sector and cross-cultural initiatives. Diversity is, therefore, not only a “soft issue”, but is becoming a crucial quality in the talent pool across all dimensions whether it is gender, ethnicity, knowledge, skills or experiences.
Embracing talent diversity in the digital age
One of the biggest headaches for CEOs today is making sure that their organisations have the right people to cope with what lies ahead. Most are looking to much broader ranges of skills when hiring than in the past – today’s CEOs need adaptable, flexible people with compound skills and a willingness to drive change forward.
CEOs are increasingly recognising that the benefits to diversity go far beyond the talent supply. In our fast paced digital world, CEOs must create an environment in which innovation can thrive.
However, though CEOs are increasingly embracing the need for diverse thinking, they are struggling to find the best way to attract and keep the range of perspectives they are looking for. According to PwC’s 18th Annual CEO survey, of the 64 per cent of global CEOs whose companies have a formal diversity and inclusiveness strategy, 85 per cent think it’s improved the bottom line, and 90 per cent said it helped them attract talent. CEOs also see such strategies as benefiting innovation, collaboration, customer satisfaction, emerging customer needs and the ability to harness technology. Unfortunately, CEO commitment to a formal diversity policy varies dramatically – three in 10 CEOs say their organisation doesn’t have a strategy to promote diversity and inclusion, although 13 per cent said they had plans to adopt one. Further, there is room for improvement in Asia – only 55 per cent of companies in Asean, 50 per cent in China and 23 per cent in Hong Kong had adopted such policies.
Millennials (also commonly known as Generation Y), an increasing percentage of the workforce, also expect their employers to embrace diversity and inclusion. Today’s millennials have grown up with an affinity for a highly globalised and digital world; their racial and ethnic profile is far more diverse than in any previous generations; and they are seen as having far more egalitarian views about the roles of women, having been exposed to recent campaigns such as HeForShe. In a recent PwC survey, 92 per cent of millennials in Singapore said that an employer’s policy on diversity, equality and inclusion is important.
The diversity dividend
Organisations, however, shouldn’t just focus on workplace diversity and inclusion – they should embrace it at the board level. Board diversity is not merely a numbers game. Greater board diversity strengthens corporate governance – by having different viewpoints, and more robust decision making, the board is less likely to have groupthink. Further, greater board diversity will widen its access to resources and increase networks. This is critically important in the digital age where the world is increasingly more unpredictable.
Numerous studies have also demonstrated a direct link between board diversity and shareholder returns.
A Credit Suisse study in 2014 showed that companies with a market capitalisation of over US$10 billion with at least one woman on the board showed a 3.3 per cent excess cumulative stock market return since 2005 (with a 55 per cent excess cumulative return in Asia-Pacific).
The Singapore Board Diversity Report 2014 reported that Singapore boards with gender diversity have an average return on assets (ROA) of 3.3 per cent versus 0.3 per cent for those without. Similar results were also reported for boards with age diversity (average ROA of 3.3 per cent versus 0.6 for those without), and ethnic diversity (average ROA of 2.9 per cent versus 0.8 per cent for those without). Other surveys have shown that greater board diversity does reduce group think. A PwC US 2014 Annual Corporate Director Survey of 863 public companies found that there are some differences in how male and female directors approach their oversight roles, and in some areas, practices of boards with female directors do vary from those of other boards. Specifically, more women say their boards have adopted governance structures or practices viewed as best practices by some stakeholders such as mandatory retirement policies. While director engagement with IT issues increased from 2013, women directors indicated that they are still not sufficiently engaged regarding IT issues and topics, and were more concerned about the digital skills of today’s boards. They also expect more when it comes to board materials, such as information on underlying assumptions behind company strategy, data or customer satisfaction research.
On the other hand, while both men and women were concerned about director-shareholder communications, male director concerns ran deeper. Of the men, 65 per cent strongly believed that it creates too great a risk of mixed messages, compared with 51 per cent of female directors.
In addition, 23 per cent of male directors don’t believe that it is appropriate to communicate directly with shareholders on any topic, compared with just 12 per cent of female directors.
Finally, in some countries, particularly the US, shareholder activists are demanding more board diversity, and better disclosure about a board’s skills, experiences, gender and ethnic diversity to help investors determine whether the board has the appropriate mix to manage risk and avoid groupthink.
What can companies do?
Creating diverse and inclusive workplaces requires individuals to be much more open minded to the value that difference adds to business. This is not easy because there is a natural tendency to gravitate towards people like ourselves.
Areas which companies could focus on are:
- Understanding the business case for diversity and inclusion for their organisation, and articulating this clearly both internally and externally.
- Embedding diversity and inclusion throughout the organisation. Responsibility for embedding diversity and inclusion should be that of all business unit leaders.
Concrete steps could include:
- Implementing a diversity and inclusion accountability framework for leaders, which takes into account both quantitative as well as qualitative measures (including alignment with the organisation’s strategy, its leadership composition, human capital processes, learning and development, as well as how the organisation works with clients).
- Increasing awareness of the importance of diversity and inclusion, for example blindspots or unconscious bias training, awareness programmes of younger staff to the importance of “confidence” in their careers, sponsorship programmes, and profiling role models.
- Reviewing diversity data on a regular basis by business unit to understand what specific actions should be taken.
- Communicating externally the organisation’s view on diversity and inclusion.
For listed companies, nominating committees should review their board nomination processes including planning for progressive renewal. When recruiting new directors, they should cast the net far and wide when recruiting directors and also consider external assistance, as appropriate (to better use the talent pool). Listed companies could also enhance their investor reporting on how new board members are nominated. Areas they could consider include disclosing their policy on board diversity in their corporate governance report, their objectives for implementing the policy, and annually disclose their company’s progress towards achieving them or specific actions to be taken in the next reporting period.
When organisations embrace greater diversity and inclusion, everyone wins.
Original article published by Business Times on 9 July 2015 is available here.