GoldenBee Insights

Diversity on board, a new perspective on ESG

source:goldencsr    date:2024-06-05 11:27:18


On August 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved National Association of Securities Dealers Automated Quotation (NASDQA)’s proposed rule changes related to board diversity.

Since then, more and more listed companies are expanding the gender, race and other diversified composition of the board at a record speed.

Uncertainties in the economic climate also intensify the demand of enterprises for board members with specific knowledge and experience. Board diversity has become a necessity for better corporate governance. 

As the core link of corporate governance structure, a board lack of diversity may render the enterprise weak against coping with the ever-changing environment and increasingly severe challenges, restricting the implementation of ESG ideas and its sustainable development.

What is board diversity?

Board diversity means having many board members that are different from one another, including gender, age, race, education, skill, nationality and so on.

1. Internal and external drive guarantees board diversity

According to research by Egon Zehnder, for all of the attention given to board diversity, there is simply not enough progress.

The is because many enterprises have not realized the significance and importance of board diversity.

Why companies should follow and continue to improve board diversity?

First, as part of DEI in ESG, global board diversity faces increasing strict regulation.

In the United States, in addition to the new ESG challenge put forward by NASDQA - proposal of board diversity, board diversity has achieved state legislation. In 2018, California led the way as the first state in the nation to require publicly held companies have at least one female director on their boards, otherwise they would be fined 100,000 USD. In 2020, a signed bill required publicly held companies headquartered in California to include at least one director on their boards who is from an underrepresented racial or ethnic community by 2021. 

On August 26, 2021, SGX RegCo also proposed to require issuers to have a board diversity policy and provide disclosure on related targets, plans and timelines in annual reports and how board diversity can meet the needs and plans of the issuers.

In China, since 2019, the Hong Kong Stock Exchange has required all issuers to disclose their board diversity policies. In 2021, it proposed to terminate the male-only boards and provided a three-year transition period for existing issuers. The boards of IPO applicants will also be expected to no longer have male-only directors.

These actions are by no means unique. Board diversity is becoming a rule that listed companies must follow.

Secondly, board diversity has become one of the ESG investment evaluation factors of international investment institutions, affecting corporate competitiveness in the capital market.

With the rapid development of ESG investment around the world, board diversity has become a necessity for international investment institutions to evaluate ESG management.

12 investment institutions in China have initiated to have more female directors, advocating that having female directors should be preferred in corporate governance assessment. They plan to launch an investment fund on gender diversity of the board, and clarify female executives and directors as the fund targets, which will promote more enterprises to pay attention to board diversity.

More importantly, board diversity is helpful to corporates’ profitability, decision-making ability and brand reputation.

In improving profitability, according to a report published by McKinsey & Company, companies with higher representations outperformed than those with fewer or none women executives in 36%. The survey of listed companies in Singapore also shows that the return on asset of boards with different genders, ages and races is 2-3% higher on average than those without diversity.

In promoting effective decision-making, diversified board members are more likely to have different leadership, ways of thinking and risk-avoiding preferences, which will help to enhance the sensitivity to risks and improve the board's ability to make effective decisions and solve problems.

In addition, a board with diversity can send a positive signal to internal and external stakeholders, indicating that the company do not discriminate against minority groups and strongly supports diversity, which is helpful to establish a corporate citizenship with social responsibility.

2. More diversity compositions bring new perspectives on ESG management

At the mention of board diversity, many people still equate it to gender diversity, but they are not the same.

In addition to gender, age, skill, race and other compositions also contribute to board diversity, providing new perspectives, ideas and thoughts on corporate ESG management.

2.1 Female members are a starting point for board diversity.

Compared with other representations, gender diversity is simpler and easier to achieve in implementation, compliance and disclosure. Companies and their board members need to realize the benefits brought by female directors, thus stimulating their potential.

Female directors can benefit the company by sending signals of positive governance and by better handling the relationship with stakeholders.

In addition, female directors can better mirror customer and client bases. The role women play in the family determines their influence on the purchase decision. With the constant changes of society and consumption trends, companies increasingly need to include women in decision-making such as market development, so as to effectively expand the market.

Moreover, women are more inclined to avoid risks. Boards with female directors are more likely to pay attention to potential risks and balance the decision-making risks caused by male directors' overconfidence. They tend to avoid radical and high-risk strategies and urge companies to strengthen risk management, improving corporate governance.

2.2 Younger members are needed in the digital era.

Although many companies have redoubled efforts on board diversity, age has long been ignored, because age represents experience, perspective and vision, which is essential for company development.

However, in fact, young people, born in 1980s and 1990s, are digital natives and important customer bases, who can better understand the consumption psychology of the new generation of target customers. Shall the selection of directors be aligned with the target customer bases, it may stimulate new vitality into corporate development.

For example, more board members of fashion brands are younger than ever. According to Ethics&Boards, seven of the 40 major listed luxury companies have board members under 40, and 30% of the younger board members participate in company management decisions as independent directors.

2.3  More skills are needed in an ever-changing and complicated environment.

Most board directors have business, accounting or legal backgrounds, but corporate decision-making requires members with multi-field professional skills and diverse backgrounds to better face diversified risks and opportunities. For example, technology updates happen in almost every industry, requiring leaders proficient in big data and network security. Many enterprises claim that employees are their most valuable asset, and their boards can also have directors with professional knowledge of human resources.

In particular, as ESG is embraced by more and more people, directors with ESG background can better cope with complex social and environmental risks, yet such skills are lacking in many boards.

2.4 Board diversity is not a cure-all, but a think tank.

As the "brain" of an enterprise, the board should be a place where members can discuss, brainstorm and decide. A board with diversity will truly listen, develop new perspectives and ideas to tell ESG opportunities from risks and improve corporate sustainability with scientific decisions. 

Board diversity, an important topic in ESG, should be regarded as top priority, rather than a last resort. 

Here are a few suggestions to bear in mind: to achieve board diversity, the chairman should encourage brainstorming while mediating conflicts between members from different backgrounds; diversity policies should be targeted with corporate’s actual needs; board talent pool should be expanded to know their candidates in advance.

It is undeniable that board diversity is not easy to either achieve or work, but it plays an increasingly vital role in corporate management. It’s time to use board diversity to inspire brainstorming with forward-looking ESG perspective and enhance corporate ESG development.