Case For Diverse Boards
Compulsory disclosure on board diversity presents opportunity for champions to shine
Taken in the right spirit, the new rule will raise the profile of Singapore-listed issuers amid the growing importance of ESG factors.
By Mildred Tan, Co-Chair of the Council for Board Diversity
The Singapore Exchange’s (SGX) decision to mandate the disclosure of board diversity policies gives corporate governance champions in the market an important opportunity to stand out above the crowd.
A new and welcome challenge now presents itself before stakeholders of the Singapore market: Can we make the best of this opportunity to improve board diversity and raise the quality of corporate governance to achieve better outcomes for companies?
Following a public consultation process, Singapore Exchange Regulation (SGX RegCo) has made the disclosure of board diversity policies part of the listing rules for financial years starting in 2022. This elevates the requirement from the more accommodative “comply or explain” approach of the Code of Corporate Governance to one where compliance is compulsory. It represents a big step forward in cementing a place in the mainstream for a fundamental aspect of corporate governance. Notably, the new requirement includes gender diversity as a key factor that companies have to address, which ensures that issuers must confront a glaring and persistent source of gender imbalance in the board rooms.
If the rule is enforced and implemented by companies in the right spirit, it will raise the profile of Singapore-listed issuers amid the growing importance of environmental, social and governance (ESG) factors to investors.
Boost to visibility
Numerous studies, including the latest EY Global Institutional Investor Survey and the Capital Group ESG Global Study 2021, have shown that the lack of robust ESG data remains one of the biggest hindrances for investors. SGX’s disclosure mandate will increase the availability of disclosures on board diversity policies, which helps to reduce the problem of incomplete data for the Singapore market and makes it easier for investors to perform analysis and benchmarking. The availability of disclosures by all issuers will also help to precipitate discovery and awareness of best practices.
In such an environment, companies that make the effort to craft strong board diversity policies and to implement them well are more likely to be noticed. Disclosures that avoid boilerplates will resonate. This is particularly important for non-blue-chip companies that can benefit from the extra boost in visibility.
While disclosure is a crucial part of board diversity, it is important to remember that it is not the end goal of corporate governance. Our lodestar is that board diversity must ultimately translate into positive outcomes for companies.
Aim for real progress
There are 2 risks to watch for. The first is a blind focus on numbers without attention paid to how those numbers are achieved. For instance, hitting a target on board gender diversity by appointing female directors who are close family members may not provide a board with the independent perspective that is desired. Appointing another female lawyer to a board already filled with legal experts when the board needs technological or supply chain expertise just to hit a target misses the point entirely.
Gender diversity is not about getting more women on corporate boards just to hit targets; it is about recognising that it is not just possible, but also imperative, that boards are concurrently competent, fit for purpose and gender-diverse.
Another risk is a lack of ambition. A board diversity policy that merely serves to allow a company to advertise that it has achieved some target entrenches the status quo, lacks impact, and is ultimately meaningless.
A diversity policy should compel the board to regularly re-examine the needs of the company and how well the board’s composition serves those needs. Gaps, when they are identified, should be closed with appropriate haste and through a sufficiently extensive search process. Outcomes need to be measured. Boards should aim for real progress and challenge themselves to make the combination of skills, talents, experience and diversity of its directors more than the sum of its parts.
Progress needs an ecosystem
Every stakeholder in our market has a role to play in helping to avoid those pitfalls.
Corporate boards, especially chairpersons, need to develop a culture that embraces board diversity among their members and within their organisations. The rapid technological changes, volatile global politics and the evolving pandemic in recent years have made it more crucial than ever to have leadership that can minimise blind spots and react to them when they are encountered amid heightened uncertainty.
Boards that abide by the principles of stewardship are better able to understand and capitalise on the benefits of a diverse board, and to adopt ambitious diversity policies to place their organisations on a more equitable and sustainable footing.
Investors must also be vigorous sentinels. Shareholders should scrutinise disclosures and commend boards that adopt and practise strong diversity policies while challenging those that only pay lip service to comply with the letter of the regulation. When companies know that investors are paying attention, they will be incentivised to raise their performance.
Advocates should continue efforts to develop and grow resources to raise the standard of corporate governance and board diversity in Singapore. These include education resources for all stakeholders, and helping to reduce the friction of searching for worthy and diverse board candidates.
There is still a lot of advocacy that needs to be done, particularly in improving women’s participation on boards. Despite no shortage of capable and board-ready women in Singapore and overseas, women still held only 18 per cent of board seats among SGX’s 100 largest primary listed companies and only 13 per cent of board seats among all SGX-listed companies as at Jun 30, 2021. Better disclosure will make it easier to identify and address areas of need.
Hallmarks of quality
When companies have more diverse boards, including more female directors, stakeholders know they have invested time and effort in succession planning and board renewal. These are all hallmarks of quality corporate governance and show companies’ commitment to long-term value creation.
The inclusion of board diversity – including specific attention to gender diversity – in the SGX listing rules is an important step in the right direction to raise the quality of corporate governance in Singapore.
But the journey is far from over, and it will take all stakeholders in the market to pull together to ensure that we can capitalise on the progress that has been made and to maintain our upward trajectory as a leading and progressive business hub.