Case For Diverse Boards
- Published on
Clear link between board diversity and corporate performance
It augurs well that firms are taking board diversity seriously to help them thrive in an uncertain world, as seen in the significant reduction in companies with all-male boards.
By Loh Boon Chye and Mildred Tan, Co-Chairs of the Council for Board Diversity
The relationship between board diversity and corporate performance is one that has been widely debated, with many studies done to try to prove whether board diversity makes an impact on performance.
But instead of referring to yet another piece of research, how about reversing the question to ask ourselves: Why wouldn’t board diversity affect performance?
In a scenario where there is no board diversity, would it enable faster board decisions in the absence of dissenting voices? Such boards may spend less time on meetings, but would it produce more holistic and considered outcomes?
In the long run, boards that are not diverse will lack a degree of robustness and rigour of thought, and decisions could be made without examining all potential alternatives.
Role of the Board
There are several factors to consider in ensuring that boards have effective outcomes that are most ideal for their company.
Ben Broadbent, deputy governor of monetary policy at the Bank of England, said in a 2019 interview that it is “crucial to have a (wide) range of views when making important policy decisions”.
“That is why we have committees to begin with,” he said. “If diversity of thought was irrelevant, then we would leave all these decisions to one person.”
The objective of a board of directors is to combine their collective wisdom for important, far-reaching decisions. The board provides the direction that could make or break the company – including decisions on the areas of the business to invest in, mergers and acquisitions, appointing the right chief executive officer, and regulatory compliance.
Having varied perspectives matters when it comes to boards’ decision-making. Boards cannot be confident in their decisions if there isn’t a good mix of experience, skill sets, backgrounds and ways of thinking among them. In an uncertain world that is rapidly changing, boards need this diversity to look forward and manoeuvre in dynamic situations. How well they do so will, in turn, affect corporate performance.
Singapore Exchange Regulation (SGX RegCo)’s recent proposal to introduce a hard cap on the tenure of independent board directors seeks to accelerate board renewal and promote board independence. This provides a clear indication of the importance of board composition. It also presents an opportunity for boards to reconsider the composition of their board and refresh it with members who bring relevant skill sets and experiences.
New forces at work
With an increasing focus on new areas such as technology advances, cybersecurity, sustainability, and climate change, more is now being asked for from boards. Technology advances, interaction with customers and supply chain resilience have now become business imperatives, and companies today are vulnerable to cyberattacks, especially if they are not well protected. Social and environmental issues also cannot be ignored, as investors and stakeholders want to know what companies are doing on those fronts. It is therefore important for boards to recognise the impact that such factors have on their financial viability and corporate performance.
Elsewhere, large institutional investors have taken action on board composition. For instance, Blackrock, Vanguard, State Street, BNP Paribas Asset Management and AXA Investment Managers have all voted against company resolutions as a result of inadequate board gender diversity in the past two years.
Regulators are also calling for increased transparency on board diversity, with SGX RegCo revising listing rules in December 2021 to require board diversity disclosure.
There is a clear push for board breadth and diversity – directors who can navigate this new terrain add both quality and resilience, which will ultimately drive performance.
Getting views of stakeholders
As more boards recognise doing business as part of a wider social and environmental framework, there needs to be a greater understanding of stakeholders’ perspectives.
One stakeholder group to consider are members of the local community, who could give insights on the impact of the company’s activities on the ground.
Another stakeholder that boards should consider is the customer. This is fast becoming a trend in stakeholder voices, according to executive search and consulting firm Spencer Stuart. Directors who have a direct line to the customer’s perspective would be better positioned to identify and seize opportunities.
All these reinforce the need for boards to make it a priority to have the capabilities to look more broadly at risks and opportunities. It is not for its own sake, but for the companies’ continued business relevance.
Gender diversity paving the way
There are many aspects of diversity that are important to boards – they could include skill sets, experiences, and perspectives on the operating environment, including geopolitical developments, among others.
In Singapore, discussions on board diversity have mostly been focused on gender as a starting point. Gender is not the only aspect of board diversity, but it is the most visible and easily tracked aspect of diversity.
Even as we keep sight on how diversity supports the needs of the business, figures on women’s participation on boards have been encouraging.
In a win for board diversity, the top 100 listed companies and statutory boards have achieved targets of 20 per cent and 30 per cent, respectively, at end-June 2022. The top 100 companies are now making headway towards its next near-term target of 25 per cent by 2025, having reached 22.7 per cent as at end-June 2023*, while in the public sector, the proportion of women’s participation on boards of statutory boards has risen to 32 per cent*. The top 100 institutions of a public character are also close to the goal of 30 per cent, at 29.5 per cent as at end-June 2023*.
Meanwhile, among the top 100 listed companies in Singapore, the number of male-only boards has dipped from 50 per cent in 2013 to 13 per cent in June 2023*.
This is progress that should be celebrated as it paves the way for other aspects of diversity to follow.
With all the collective efforts of people, public, and private sectors, Singapore is headed in the right direction. It is critical that organisations continue to embrace the diversity agenda to future-proof themselves and to deliver enterprise value, given the increasingly complex business environment.
This article was published in The Business Times on 1 November 2022, “Clear link between board diversity and corporate performance“.
*Updated 25 September 2023 to reflect most recent data compiled by the Council for Board Diversity.
Board Diversity Vital for Long-term Success