Is diversity of directors or their independence the bigger issue in corporate boardrooms?

    BlackRock voted against directors on independence- related issues far more in Asia than in the US or Europe


    The Business Times, 21 September 2020

    WHEN it rains, it pours. The topic of board diversity made headlines in Singapore this past week, not once, but twice.

    On Sept 16, the so-called Singapore Board Diversity Index was unveiled, with Singtel, Singapore Exchange and Mapletree Commercial Trust in the top three positions.

    Developed by Willis Towers Watson (WTW) in partnership with the Singapore Institute of Directors (SID), the index seeks to quantify the extent to which local public-listed companies have embraced board diversity, based on eight factors: gender, age, tenure, board independence, cultural ethnicity, international experience, domain expertise and industry knowledge.

    Then, on Sept 17, Refinitiv announced the "Top 100" most diverse and inclusive organisations globally for 2020 as ranked by its Diversity & Inclusion (D&I) Index. Among the 100 companies were two from Singapore - namely, Singapore Airlines and Singtel, which were ranked 31st and 35th, respectively.

    The D&I Index is about more than just board diversity, though. Launched in 2016, it ranks the top 100 publicly traded companies globally with the most diverse and inclusive workplaces, as measured by 24 metrics across four key pillars - diversity, inclusion, people development and controversies.

    Nevertheless, the environmental, social and governance (ESG) data used by Refinitiv to build the index includes metrics of cultural and gender diversity of corporate boards.

    Among the findings from the D&I report for 2020 was that cultural diversity of board members globally has increased from five years ago, but has stalled at around 30 per cent.

    Another finding was that women now account for about 12 per cent of an average board in Asia-Pacific (Apac), which represents a 53 per cent increase over the last five years. Women make up about 19 per cent of an average board globally.

    Importance of diversity

    To be sure, corporate boards need to evolve to remain effective in an increasingly unequal and divided world that faces the big existential threat of climate change.

    "Directors with diverse backgrounds bring different perspectives and ideas that avoid group-think and help to enhance the board's deliberations and decision-making process," said Shai Ganu, managing director and executive compensation global practice leader at WTW, in a statement last week.

    "Companies have the transformative power and social responsibility to contribute to a more open, diverse and inclusive society. We all need to play a role in helping to collectively champion the change. A diverse board sets the tone at the top of the organisation," Mr Ganu added.

    Large institutional investors have also been raising the issue of board diversity with companies in which they are invested.

    Setting out its thinking on the matter, BlackRock Investment Stewardship (BIS) said in a commentary in January: "Diversity - and the inclusion of different perspectives - is a globally relevant feature of board quality and effectiveness, although pertinent diversity characteristics may differ across markets based on the available labour pool."

    It went on to say that it expects "boards to include a diverse array of individuals who bring their personal and professional experiences to bear, in order to foster constructive dialogue on boardroom matters".

    "In identifying potential candidates, boards should consider the full breadth of diversity including personal factors such as gender, ethnicity, and age, as well as professional characteristics, such as a director's industry, area of expertise, and geographic location," BIS added.

    Diversity uneven in Apac

    Yet, although BIS has been advocating for board diversity in its broadest sense, the focus of its voting at shareholder meetings has been specifically on gender diversity as this is widely disclosed by companies. And it is companies in the United States and Canada that have been at the receiving end of its reproach.

    For the year to June 30, BIS voted 1,569 times against the election of directors globally because of insufficient progress on board diversity, according to its annual report. Companies in the Americas accounted for 1,367 of these negative votes. Only 178 related to companies in the Europe, Middle East and Africa (Emea) region, and just 24 related to companies in Apac.

    BIS said it voted against directors on diversity-related concerns less frequently in Europe, partly because government-mandated diversity targets and quotas in the region have resulted in more women sitting on boards.

    As for the Apac region, BIS said it tends to raise the issue of gender diversity only in markets with more mature corporate governance practices such as Australia, Japan, Singapore and Hong Kong.
    "In other Apac countries, we are often seeking greater diversity of professional experience on boards," BIS said.

    For instance, BIS noted that it has been engaging with a semiconductor manufacturer and a steel producer in Taiwan, which have appointed academics as independent directors.

    "Recruiting academics as independent directors is common in Taiwan and Apac in general, because professors are widely respected," BIS said. "While we welcome the perspective they bring, in our view, business professionals have practical experience and knowledge that can contribute to more effective board advice and oversight of management."

    Board independence

    Judging from the pattern of its voting, BIS regards board independence to be a more serious issue in Asia.

    For the year to June 30, BIS voted 1,762 times against directors globally on concerns about director independence. Companies in Apac accounted for 1,058 of these negative votes. Only 246 related to companies in the Americas, and 458 involved companies in Emea.

    "In markets like the US and UK where director independence has been a focus for investors for many years, most boards have a sufficient balance of independence," BIS noted in its annual report.
    Companies in Asia are a different kettle of fish.

    "Many publicly traded companies in Asia have a controlling shareholder or block of shareholders who act together. Control is often effective at a declared shareholding of 30 per cent or more of issued share capital, as the largest shareholder will often have aligned but undeclared shareholders that can be counted on to support their interests," BIS said in its annual report.

    "Unless required by listing rules or regulation, controlled companies rarely have truly independent directors, and the approach to independence is compliance driven.

    "Given ownership structures, independent directors tend to be more aligned with the controlling shareholders than with the wider shareholder base. As a result, we often have concerns with the balance of independence on boards," BIS added.

    So, what should be done to protect minority investors in these markets?

    "We engage with controlled companies to provide our feedback and to encourage governance mechanisms that afford additional protections for minority shareholders in certain circumstances, such as related party transactions and director elections," BIS said in its annual report.

    "We also engage with policy makers and industry associations at the market level to advocate for enhanced governance standards that protect minority shareholders," it added.

    In order to advance the interests of local minority investors on this front, perhaps it's time for someone to come up with an index that quantifies and compares the independence of the boards in Singapore versus the rest of the world.