(c) Hong Kong Institute of Certified Public Accountants. Contact HKICPA for permission to reproduce this article., Corporate Governance, Stock Market, Uncategorized

Should HKEx Diversify Their Board?

By George W. Russell

A recent initiative suggests Hong Kong-listed companies should diversify their board composition. George W. Russell looks at what is being done to stir up the mix.

The reason behind the decision by Hong Kong Exchanges and Clearing to issue a code provision to promote board diversity is revealed by a cursory glance at a profile of the average Hong Kong-listed company director: of Chinese descent, a Hong Kong resident, mid-50s and likely male.

While the ethnic average is no surprise, the preponderance of middle-aged men has prompted the exchange to take action in a bid to make the city’s directors better reflect society as a whole.

“We are of the view that diversity encompasses more than simply gender and age [but] statistics on gender and age are, to an extent, representative of the diversity or lack thereof on issuers’ boards,” says David Graham, the HKEx chief regulatory officer and head of listings.

As a result, HKEx has issued amendments to its Corporate Governance Code that will take effect from 1 September. The code provision directs all listed companies to report on their diversity policy and supply considered reasons should they not conform.

Under the stock exchange’s “comply or explain” code provision, listed companies are expected to implement policies to encourage more women, men aged 40 or younger and people of wider professional experience to join their boards.

Board imbalances
Though by no means the only measure, women are the most obvious glaring anomaly when it comes to boardroom diversity in Hong Kong. Although women account for roughly half the city’s population, they comprise just over 10% of board positions in Hong Kong’s listed companies, according to HKEx data. Four out of 10 listed companies have no women on their board at all, the exchange noted.

“Gender diversity in Hong Kong is somewhere between poor and extremely poor,” says Keith Pogson, leader of Ernst & Young’s Asia Pacific financial services office, immediate past president of the Hong Kong Institute of CPAs and a prominent diversity advocate in the accounting profession.

HKEx statistics also show that two-thirds of directors on Hong Kong-listed issuers’ boards are between the ages of 41 and 60. Nearly a quarter of directors are over 60.

“While gender is obviously important, age is important, too,” says Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong.

Chinese companies listed in Hong Kong are setting the pace when it comes to younger directors, Allen notes. “A lot of [Mainland] companies being listed in Hong Kong have chairmen and chief executive officers younger than 50,” he says. “If you look at the boards of Hong Kong companies, particularly bigger ones, they tend to be much older.”

Ethnicity is another factor, says Allen, though not a critical one for domestic companies. “If you have an international company with no international or foreign directors then the question is: do you have a board that really has the range of skills and expertise you’re looking for?”

While discussions on diversity typically refer to visible indicators such as gender, ethnic background and age, there are other factors, notes Fern Ngai, chief executive of Community Business, a Hong Kong-based non-profit organization seeking to advance corporate social responsibility in Asia.
“These may include an individual’s cultural and educational background, professional skills and experience, as well as their personality and behavioural traits,” Ngai adds.

Pogson argues for more non-Hong Kong residents to be appointed to boards. “A lot of areas where companies struggle is when they want to be multinational rather than national,” he says. “They lack the cosmopolitan influence.”

Another consideration, more peculiar to Hong Kong and Asia in general, is directors who are family members of company owners. “There’s a very big difference between family-owned companies and companies where there is no one clear majority shareholder,” says Pogson. “Management [in companies that aren’t family owned] is much stronger and corporate governance is there to protect the shareholder interests.”

Benefits of diversity
The jury is out on the exact correlation between board diversity and performance metrics such as profitability, efficiency or share price, and HKEx is cautious about generalizing about board diversity and better-run companies.

“Numerous academic research indicates that increased diversity on boards is associated ciated with better financial performance,” says Graham at HKEx. But he adds, “The exchange is unable to comment on whether there is an established link between diversity and financial performance of a firm.”

There have been several studies suggesting that having a generally more diverse board makes financial sense. A Credit Suisse Research Institute study of 2,400 companies between 2005 and 2011 published last year suggested that companies with at least some female board representation outperformed those with no women in terms of share price performance.

Advocates say changes should be made for sound business reasons. “This is not diversity for diversity’s sake,” says Ngai of Community Business. “It is about improving board performance and positively affecting the company’s business results.”

Proponents of diversity argue that it can promote effective decision-making and better governance. “Board diversity gives diversified insights and knowledge,” says Nelson Lam, an HKICPA fellow who heads Nelson and Company, a CPA firm. “Issues faced by an entity can be viewed from different angles and more comprehensively.”

Graham at HKEx agrees. “Research also indicates that board diversity prevents groupthink, utilizes talent and improves corporate reputation,” he says. “We are optimistic that the new measures will lead to changes to corporate behaviour.”

Hong Kong companies that already have a more diverse board stress the benefits. “Directors from a diverse and complementary background bring more collective insight and enrich constructive board discussions on strategy,” says Wendy Yung, executive director and company secretary of Hysan Development Company and an HKICPA member. Hysan’s board of 14 includes four women, which is a relatively high proportion.

Allen at the Asian Corporate Governance Association agrees, saying that looking outside established sources for directors encourages a “move away from family members, friends or like-minded people cut from the same cloth. It moves away from a homogenous board that doesn’t question decisions.”

HKICPA has lent its support to the HKEx initiative, which will be regularly reviewed for effectiveness. On 5 March, HKICPA hosted a discussion, “Gender diversity in the boardroom,” in which panellists discussed the obstacles that women face in attempting to climb the corporate ladder.

Peter Tisman, HKICPA’s director of specialist practices, is a reviewer of the draft guide for Hong Kong-listed companies, Improving Governance through Diversity, to be issued in Chinese (both traditional and simplified) and English by Community Business this month.

Such activities might help overcome the resistance to the measure noted by pro-diversity advocates. “I believe the main challenge is to change the mind-set of existing board members to accept diversity,” says Jenny To, regional recruitment and talent development director at Pernod Ricard Asia in Hong Kong and an HKICPA member.

International experts warn that existing boards might resent an invasion of newcomers with different backgrounds. “People [who come from outside] the mainstream could be side-lined or kept out of the decision-making process,” says Joseph Santana, a diversity and inclusion consultant in New York.

Allen agrees, saying that if HKEx had made board diversity mandatory rather than a “comply or explain” code provision, there would have been fiercer resistance. “I guarantee there would have been a lot of opposition,” he says. “There were a lot of quite sexist responses to the proposal.”

Another challenge is the limited pool of “board-ready” professionals in Hong Kong. “The number of senior accountants and lawyers around town is somewhat limited,” says Pogson at Ernst & Young. “You find a lot of familiar faces on boards around town.”

One solution is the pool of board-ready women that the Hong Kong government has appointed over the years to statutory bodies. “It’s actually about building a pipeline,” says Pogson. “People have progressed by sitting on government bodies, charities and subsidiary boards so when they end up on the main board of a major organization they have a good track record.”

Pogson points to the launch next month of a Hong Kong branch of the London-based 30% Club, a female-director advocacy group, as an encouraging development. “We’ve got a lot of support around town for that,” he says.

What also remains to be seen is how many diverse characters will actually seek or accept Hong Kong board appointments. “The rewards of sitting on boards are not very exciting,” says Pogson. “There needs to be a revisit on board remuneration so that you do attract the right talent.”

Diversity advocates remain hopeful, however. Su-Mei Thompson, chief executive of The Women’s Foundation, a Hong Kong advocacy group, says there’s no reason why the city can’t lead the world in diversity.

“As a major financial centre with an abundant talent pool of qualified men and women, I believe Hong Kong has the opportunity to assert itself as a modern, sophisticated economy that nurtures talent across the workforce.”

This article was originally published in the March 2013 issue of A Plus.

[stextbox id=”info” caption=”A Worldwide Phenomenon”]

Hong Kong is the latest major financial market to take action on board diversity — especially in terms of gender. “The lack of women on boards is a worldwide phenomenon and a reflection of a wider issue concerning diversity,” says David Graham, chief regulatory officer and head of listings at Hong Kong Exchanges and Clearing.

Some European countries, such as Norway and France, have introduced mandatory board quotas for women. “We’re not against mandatory quotas but it’s open to abuse,” says Jamie Allen, secretary general of the Asian Corporate Governance Association. “The good companies take it seriously but the majority would do the minimum to comply.”

In the United Kingdom, the percentage of women on the boards of the 100 largest listed companies has risen over the past year to a record 15.6%. The British government has told FTSE 100 companies to have a minimum 25% of female directors by 2015 or else face as-yet-unspecified measures.

In Australia, 15.4% of ASX 200 board members were women as at 21 February, according to the Australian Institute of Company Directors. More than 50 of the index’s boards still do not have any women directors.

Listed companies in Australia must issue a statement about the mix of skills and diversity that the board is looking to achieve. “New directors are generally appointed to fill perceived gaps in skills, experiences and knowledge,” notes Katie Spearritt, chief executive officer of Diversity Partners, a consultancy in Melbourne.

The situation in the United States is little better, where by the end of 2012, women held 16.6% of board seats at Fortune 500 companies. Kathy Liu, chief financial officer at apparel maker Kizan International in Brisbane, California, notes increasing pressure in the U.S. from institutional investors demanding board diversity.

“The California Public Employees’ Retirement System [the largest public pension fund in the U.S.]… is one of the leaders in this area, promoting diversity of skill set, background, perspective and experience,” says Liu, a Hong Kong Institute of CPAs member.

Liu noted that the pension fund has written diversity guidelines into its corporate governance to encourage companies to take into account historically under-represented groups on the board, including women and minorities, and raises board diversity issues with under-performing companies in its US$175 billion portfolio.

[/stextbox]