Is there a business case for Board Diversity?

Despite the many studies from different countries on the benefits of board diversity — with at least 90 (and counting) all pointing to a correlation between more women on boards and companies’ better financial performance — there remains skepticism or hesitancy among organizations on adopting policies to make their boards more diverse, and not only […]

Is there a business case for Board Diversity?

Despite the many studies from different countries on the benefits of board diversity — with at least 90 (and counting) all pointing to a correlation between more women on boards and companies’ better financial performance — there remains skepticism or hesitancy among organizations on adopting policies to make their boards more diverse, and not only in gender, age, and skills, among others. Thus, in my gender equality and women’s economic empowerment advocacy work, I am often asked: “Is there a business case to be made for board diversity?”

REGULATORY ENVIRONMENT FOR BOARD DIVERSITY
The Securities and Exchange Commission (SEC) itself recognizes the importance of board diversity. The Revised Code of Corporate Governance (RCCG) for Publicly Listed Companies (PLCs) recommendation 1.4. states that “the board should have a policy of board diversity.” It further explains: “Having a board diversity policy is a move to avoid groupthink and ensure that optimal decision making is achieved. A board diversity policy is not limited to gender diversity but also includes diversity in age, ethnicity, culture, skills, competence, and knowledge. On gender diversity policy, a good example is to increase the number of female directors, including female independent directors.”

While the SEC continues to adopt a “comply or explain” approach with respect to sustainability reporting, it has taken concrete steps to encourage companies to have more women in their boards.

In March 2022, the SEC launched the gender and development awards to recognize and acknowledge the PLCs with the greatest number of women on their boards. The awards will be continued this year, with an expanded scope to recognize private sector female sustainability champions, young female CEOs, along with female representation in the board room.

WALKING THE TALK
Allow me to share some concrete private sector initiatives that promote board diversity.

At the Institute of Corporate Directors (ICD), the Board of Trustees is diverse with almost parity in gender, with a median age of 63 (the youngest trustee being 45 and the oldest 75), and members having diverse industry skills and experience. The current Board of Governors of the Management Association of the Philippines (MAP) is comprised of four females and five males, likewise almost parity in gender.

BEING PROACTIVE AND INTENTIONAL ON DIVERSITY, EQUITY, AND INCLUSION
The ICD has organized a board diversity, equity, and inclusion (DEI) committee to champion board diversity so that different perspectives and ideas are considered in the exercise of the responsibilities of boards for oversight, decision-making, and governance. Similarly, MAP has its own DEI committee as a separate cluster together with the NextGen committee, recognizing its importance as a management concern and giving focus on programs that will promote DEI, not only in the board but also in all aspects of business.

In 2021, a group of like-minded women organized the NextGen Organization of Women Corporate Directors (NOWCD) to help increase the representation of women leadership positions in public and private company boards which, in 2021, was reported at only 20% in PLCs, below the recommended ratio of at least 30%. Key priority areas of NOWCD are to provide education and training, create meaningful networking for sourcing and placement, expand local and international board opportunities, and build a pipeline of board-ready women.

ICD STUDY ON BOARD DIVERSITY IN PLCS
A key activity of the ICD DEI Committee is to undertake relevant studies, surveys, and dialogue in advancing board diversity and inclusion. In 2022, ICD conducted a study on board diversity in PLCs covering the period 2019 to 2021. Using statistical tools and analysis, the study examined the correlation between the attributes of the boards of 270 active PLCs and their respective returns on equity (ROEs), which are indicators of the companies’ profitability.

The study generated several interesting observations:

• On gender diversity: The presence of women directors in boards in 2020, the start of the pandemic lockdown, showed a significant relationship with ROE. Companies with female directors outperformed companies with an all-male board, though the same was not observed in 2019 and 2021. The percentage of female board members during the three-year period was 17.83% in 2019, 18.82% in 2020, and 19.81% in 2021.

• On the diversity dimensions of age and tenure: the study showed that during the three-year period, age and ROE were significantly and directly related. The higher the mean age of directors, the higher the company’s ROE. However, tenure was not a significant predictor of ROE.

  With respect to the directors’ field of expertise, companies that performed significantly better than their respective counterparts were those that have non-executives, and directors, with expertise in business management and finance.

What do these findings suggest?

• The presence of women in a board has a significant contribution to the improvement of the ROE of a business entity.

• Having board members with expertise in business management and finance can boost the business’ bottom line.

• The knowledge and experience of directors senior in age should be harnessed to enhance performance. Moreover, a company should adopt a succession plan to recruit young directors.

The undeniable correlation between specific dimensions of diversity and corporate financial performance, as highlighted by the ICD study, reinforces the urgent need for businesses to prioritize board diversity. Recent events have clearly shown the necessity of diverse teams and leaders in navigating the challenges of our rapidly evolving world.

By embracing DEI, companies not only drive business performance but also contribute towards economic and social progress.

The time for action is now, and companies both have the opportunity and responsibility to show commitment to meaningful change. By taking proactive steps to foster diversity, show accountability, and take tangible steps towards inclusion, companies can propel themselves forward and truly embody the values that support both business success and social progress.

This article reflects the personal opinion of the author and does not reflect the official stand of the MAP.)

 

Ma. Aurora “Boots” D. Geotina-Garcia is a member of the MAP DEI Committee. She is vice-chair and president of the ICD, chair of NOWCD and president of Mageo Consulting, Inc., a corporate finance advisory services firm.

map@map.org.ph

magg@mageo.net