Case For Diverse Boards
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Why Gender Diversity Matters : A Competitive Advantage
The following write-up is extracted from Diversity Task Force’s report published in April 2014
By THE DIVERSITY ACTION COMMITTEE
Getting women on boards is … about ensuring that decisions made in the boardrooms reflect the realities of the society and the market… It is also about harnessing the individual and combined talents of people to make more holistic and balanced decisions.
The topic of ‘diversity’ is increasingly important as economies become progressively globalised and business challenges become more progressively globalised and business challenges become more complex. In recent years, boardroom diversity has been a much-discussed topic by regulators, lawmakers, research institutions and industry bodies globally. Although diversity encompasses many elements, much of the discussion has been in the area of gender diversity.
There has been a range of studies in recent years which observed that companies with more women on boards perform better financially than others with fewer women. For seven years, McKinsey & Company’s annual ‘Women Matter’ studies have shown a positive correlation. For example, in 2013 McKinsey & Company reported that companies with top-quartile representation of women on boards had 47% higher return on equity (ROE) on average and 55% higher earnings before interest and tax on average, than those without any woman on their boards, across various industries1. In its report ‘Gender Diversity and Corporate Performance’, Credit Suisse noted that the average ROE of companies with at least one woman on board from 2005-2011 was 16%; this is 4 percentage points higher than the average ROE of companies without any woman on their board2. In addition companies with women on their board tend to have a higher price/book value (2.4 times) compared to companies without (1.8 times)3.
On the other hand, there are studies that do not support the causal links between board gender diversity and improved financial performance. For example, the study by Carter, Souza, Simkins and Simpson titled ‘The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance’, did not find “any empirical evidence of causation going from board diversity to financial performance, either positive or negative”4. This is similar to Broome and Krawiec’s research ‘Signalling through board diversity: Is anyone listening?’, which acknowledged the challenges with establishing causation between board diversity and improved financial performance. They too were not certain if high-performing companies endorsed gender diversity or if gender-diverse boards led to more competitive business5.
More studies on the linkage between gender diversity and financial performance may be needed. However what is clear from other streams of research is that gender diversity benefits companies in the following ways:
- It leads to better board effectiveness and corporate governance;
- It allows companies to better leverage on talent and compete more effectively; and
- It addresses the demand by shareholders and institutional investors for board gender diversity.
Better Board Effectiveness and Corporate Governance
Research has shown that better gender diversity improves board effectiveness in the form of better monitoring, improved decision-making, formulation of more balanced policies and other outcomes. This leads to better corporate governance.
Boards are often criticised for having members with similar background, education and network. Such homogeneity is more likely to produce ‘group-think’6. Better decision-making is more likely to occur if directors have a diverse range of experience and background. Women bring different perspectives and voices to the table, to the debate and to the decisions.
When you have gender diversity, you reduce “group think” substantially. And the moment you reduce “group think”, your strategies and decisions will be smarter and less prone to error. In general, men tend to lead with confidence and aggression. Women prefer to lead with caution and seek a holistic approach. The benefit of a combination of these approaches is substantially greater than either of these approaches on their own.
Female directors help to enhance board independence7. Women generally take their non-executive director roles more seriously, preparing more conscientiously for meetings. Women ask the awkward questions more often, decisions are less likely to be nodded through and so are likely to be better8.
In addition, there is a negative association between female directors and insolvency risk, i.e. gender balance reduces insolvency risk. This negative correlation appears to hold good irrespective of size, sector, ownership and age of companies9.
Better Use of the Talent Pool to Compete Effectively
As women represent half the global talent pool, it is clear that they should be at the forefront of the economic and social scene as well, not out of a sense of fairness but to ensure that the very best minds, men’s and women’s alike, are brought together to address complex business challenges.
In times of manpower shortage and an ageing population, we can no longer afford to under-utilise female talent. The competition for talent is global, and talent matters to bottom-line results13. Companies that do not provide sufficient incentives and opportunities for more women to rise to the top will lose them to others that do.
No manager operates his or her plants at 80% efficiency when steps could be taken that would increase output. And no CEO wants male employees to be underutilized when improved training or working conditions would boost productivity. So take it one step further: If obvious benefits flow from helping the male component of the workforce achieve its potential, why in the world wouldn’t you want to include its counterpart?
The lack of women directors on boards would not be a cause for concern if there was a scarcity of capable women. However, this is not the case. Over the last few decades, women have achieved much progress in education and at work. Women are now the “new majority” in the global talent pool10. In Europe and the USA, 60% of university graduates are women. In the UK, women make up almost half of the labour force. In Singapore’s case, female participation in the workforce for the resident population rose from 51% in 2003 to 58% in 2013. In 2013, females accounted for 45% of the resident work force11. Among those aged 25 to 34 in 2012, 76% of females held tertiary qualifications, compared to 72% for men12.
As women represent half the global talent pool, it is clear that they should be at the forefront of the economic and social scene as well, not out of a sense of fairness but to ensure that the very best minds, men’s and women’s alike, are brought together to address complex business challenges.
In times of manpower shortage and an ageing population, we can no longer afford to under-utilise female talent. The competition for talent is global, and talent matters to bottom-line results13. Companies that do not provide sufficient incentives and opportunities for more women to rise to the top will lose them to others that do.
Having a female perspective, especially for service-based companies, is important for the business. If half of the customers are female, you better get a female perspective.
Furthermore, firms with gender-diverse boards tend to foster a diverse workplace culture. Thus they are in a prime position to attract talent and compete effectively in an increasingly globalised and diverse market.
Demand by Shareholders and Institutional Investors for Board Gender Diversity
When women are at the table, the discussion is richer, the decision-making process is better, management is more innovative and collaborative, and the organization is stronger. Because companies that advance and empower women are, in our view, better long-term investments, we are encouraging companies in our portfolios to enhance their performance on gender issues.
The global financial crisis in 2008 revealed severe shortcomings in corporate governance, including the lack of diversity in terms of gender, race/ethnicity and international expertise14. As a result, capital markets and shareholders/institutional investors are paying greater attention to companies’ corporate governance, including and especially the gender composition of boards of these companies.
Shareholders and institutional investors value companies with women on their boards. This is because the board is able to tap into a diversity of talent and leadership styles15, so that the board can be better governed and better managed in order to enhance long-term growth prospects and value for shareholders. This presents a win-win proposition for the company, its shareholders and institutional investors.
For example, the International Corporate Governance Network (ICGN), comprising institutional investors responsible for managing more than US$18 trillion in assets, stated that boards should have a “sufficient mix of relevant skills, competence, and diversity of perspectives”16. The ICGN considers gender diversity an important factor in helping to ensure a diversity of perspectives on the board.
Major institutional investors, California Public Employees’ Retirement System (CalPERs) as well as Amazone, have included gender diversity as an indicator among their investment criteria. In addition, corporate governance rating agencies such as GMI Ratings are increasingly developing tools to measure gender diversity as a key performance indicator for corporate performance and investment recommendations.
Investors around the world are urging companies to improve their board gender diversity. For example, in the UK, institutional investors have been proactively engaging FTSE 350 companies to urge them to increase the number of women in leadership positions within the companies17. In the US, the Thirty Percent Coalition (a group of senior business executives, national women’s organisations, institutional investors, corporate governance experts and board members) have been writing to companies who have no female directors, urging them to improve female representation on their boards. These investors control US$1.2 trillion in assets18. As at June 2012, they have written to 127 companies.
Indeed, the benefits of gender diversity on corporate governance and management of companies should ultimately translate into better valuation and long-term shareholder value.
The current level of women representation on boards in Singapore does not position Singapore and our companies favourably in the eyes of shareholders and institutional investors. We must be mindful that women themselves are also shareholders and would be looking out for companies with good women representation on boards. Attracting shareholders and investors to Singapore would allow us to create a vibrant economic ecosystem and ultimately give our companies a competitive edge in the global marketplace.
Singapore has always been an excellent country to work in, in terms of meritocracy, ease of working, day-to-day business etc. As a leading international financial centre, Singapore is recognised for its high governance standard and practice. Good governance includes board diversity and it is evident that gender diversity remains a challenge in Singapore’s boardrooms. Based on recent data, we have only 8% female board representation, which is way lower than our Asian neighbours. It is time that we pay greater attention to and address this lacking in our boardrooms. Authorities, professionals, companies and directors are already working together to take bigger and bolder steps to nurture and establish a well-balanced marketplace of best talents from both genders.
3Ibid.
4Carter, A. D., D’Souza, F., Simkins, J. D. and Simpson, G. W. “The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance”, Corporate Governance: An international Review, 18 September 2010, pp. 369, 411
5Broome, L. and Krawiec, D. K. “Signalling through board diversity: Is anyone listening?”, University of Cincinnati Law Review, 77, 2008, pp. 431, 433-434
6Maznevski, M. L., 1994 “Understanding our differences: Performance in decision-making groups with diverse members”, Human Relations, 47(5): 531–52.
7Fondas, N. and S. Sassalos 2000, “A Different Voice in the Boardroom: How the Presence of Women Directors Affects Board. Influence over Management”, Global Focus, 12: 13-22.
8Izraeli, D. “Women directors in Israel”, Women on Corporate Boards of Directors: International Challenges and Opportunities, 2000, pp. 75–96.
9“Women on Boards”, February 2011
10“The Beauty of Diverse Talent”
11Singapore Workforce, 2013, Ministry of Manpower, November 2013.
12Educational Profile of Singapore Resident Non-Students, Statistics Singapore Newsletter, Singapore Department of Statistics, March 2013.
Board diversity is more than a number