Dismantling the glass ceiling—progressing board gender diversity in Asia

What does the board gender diversity picture in Asia look like?

It’s generally accepted that Asia is behind the curve when it comes to embracing the idea of gender diversity on corporate boards relative to Europe and North America. Nonetheless, it’s difficult not to feel discouraged when it emerged that the percentage of women appointed to the boards of firms listed on Hong Kong’s Hang Seng Index rose by 0.1% to 13.7% over the course of 2020.¹ What this data point suggests is that without substantive change, it could take several hundred years for Hong Kong—one of the region’s top financial centers—to reach the widely used 30.0% target² for female representation on corporate boards.

Unfortunately, in many countries in Asia there remain a variety of challenges that can deter women’s advancement in the workplace. Thankfully, we live in a society that has progressed to a point where few, if any, would openly challenge the importance of promoting gender diversity on corporate boards: Indeed, gender equality is listed as one of the United Nation’s 17 Sustainable Development Goals.

The corporate world has pursued the goal of gender diversity in slightly different ways. In North America, the goal was largely expressed through diversity, equity, and inclusion initiatives in which gender diversity and representation are key elements. In Europe, the initiative is embedded in the social and governance components of the broader environmental, social, and governance (ESG) movement. Unsurprisingly, the issue has also become an increasingly important topic for corporate leaders in Asia, particularly when viewed through the broader lens of sustainability.

While the percentage share of women being appointed to the boards of listed firms globally has risen significantly over the past decade, we’re still a very long way from achieving broad representation, particularly in Asia. What’s striking is that board gender diversity varies widely within the continent, with Malaysia and India achieving more success on this front than other markets such as Japan and South Korea. The conclusion, however, remains unchanged: The continent has a lot of catching up to do and the region’s corporate leaders, investors, and regulators need to work out what can be done to address the issue.

Source: OECD, 30% Club Malaysia, as of February 9, 2023. 

Board gender diversity: the business case vs. the financial case

It isn’t difficult to understand the business case for board gender diversity: In its most organic form, it symbolizes a company’s commitment to equality and inclusion. A diverse board is also widely seen as a sign of strong corporate governance, an important quality that can prevent groupthink and stop a firm from being unduly influenced by the tone from the top. It’s also widely accepted that companies can benefit from the varied perspectives, skill sets, experiences, and ideas that a diverse board can bring.

The business case for board gender diversity doesn’t end there—it’s also often associated with more effective decision-making, better use of the potential talent pool, and improved risk management.  There have also been studies linking a more balanced board gender makeup to better environmental practices. The financial argument for board gender diversity, however, is less conclusive than hoped.

The correlation between profitability and female representation on corporate boards has been the focus of much research over the past decade. Consulting firm McKinsey’s work in this area has raised public awareness on the subject and the firm’s findings have often been cited as evidence that board gender diversity can indeed lead to improved profitability; however, other research isn’t always able to establish a clear, positive correlation between the two. 

"There have also been studies linking a more balanced board gender makeup to better environmental practices."

In our view, this could be a reflection of oversimplification and needs to be evaluated further. While diversity is intuitively good for business, boards, and management teams, correlations may not provide the full picture. Historical studies may be affected by data availability and further restricted by the absence of a meaningful, representative sample size, not to mention other qualitative factors that could affect outcomes (for instance, how appointments were made and what roles female board members were given). Benefits may also take time to accrue, but they can be difficult to separate from confounding factors. What’s encouraging is that more recent findings from relevant research conducted in Asia have been highly persuasive.

A 2020 study of more than 6,000 listed nonfinancial companies in Mainland China focusing on financial performance between 2010 and 2019 concluded that female directors do make a positive difference to a firm’s profitability. In India, a 2019 study of the country’s 139 biggest listed nonfinancial companies over a five-year period found a positive relationship between the proportion of independent female directors on the board and a firm’s financial performance after considering factors such as board size and leverage levels. Studies conducted in Malaysia and Singapore have also offered similar conclusions.

It’s fair to say that board gender diversity is an area where a definitive conclusion is likely to be elusive, and debates on the subject will no doubt continue; however, with evidence tipping to the favorable end of the scale, inaction should arguably be considered a financial risk and therefore unacceptable. 

Investors are demanding action

As ESG awareness grows, investor understanding—and attitudes—toward board gender diversity and the broader issue of gender equality have become more sophisticated. Financial firms such as Morningstar and Bloomberg, for instance, have opted to develop gender-equality-themed indexes to respond to growing investor demand for quantifiable ways to measure how businesses, investment products, and even sovereign states are faring on this front.

Investment consultants—including Mercer and Willis Towers Watson—are paying greater attention to gender diversity. It’s become a key consideration for investors who are seeking to align their portfolios with their values. In the past few years, there’s been a noted increase in instances where investment managers are required to submit diversity data as part of the early-stage due diligence process. This isn’t a trend that’s likely to go away any time soon, and Asia isn’t isolated from this development either.

Furthermore, at the macro level, we believe the growing focus on board gender diversity has important implications for the development of Asia’s fixed-income markets, particularly in view of the role that the capital markets are expected to play in the continent’s drive to transition to a sustainable future. If the issue is increasingly important to global investors, then logic implies that it must also be important to bond issuers in the region.

As long-term investors ourselves, it must be said that board gender diversity matters to us as well—it’s a factor that the Asian fixed-income team considers when assessing investment opportunities, with assistance from our ESG experts on the ground. While the lack of board gender diversity on the board of a debt issuer doesn’t necessarily mean that we would exclude the firm’s bonds from our investment analysis process, how the firm responds to questions related to the subject and its openness to engage in a constructive dialogue could influence investment decisions.

Improving board gender diversity in Asia: next steps

Investor engagement

Two main ways in which institutional investors can act to advance the issue: by exercising their rights to vote as a shareholder and through active, collaborative engagement with firms and market participants, including regulators. It’s common for investors with voting shares in a company to integrate board gender diversity into their voting policy and decisions.

For instance, at Manulife Investment Management, we’ve incorporated the principle of board gender representation into our proxy voting policy, emphasizing our belief that boards with strong gender representation are better equipped to manage risks and oversee business resilience:

• We generally expect investee firms to have at least one female director on the board.
• We encourage our investee firms to aspire to a higher balance of gender representation.
• We may hold boards in certain markets to a higher standard as market requirements and expectations change.

Engaging in meaningful dialogues with investee companies can also be a critical way for institutional investors to effect change. Our ESG experts share industry best practices and make recommendations on hiring policies with our investee firms in a respectful manner in the hope of laying the foundations for change by explaining why they’re important to us as investors. Sometimes, it can also be helpful to contextualize how market expectations of good corporate governance pertaining to board gender diversity have evolved.

Outside of corporate engagement programs, institutional investors can also engage with exchanges and contribute to regulatory developments either directly or through relevant industry bodies to lobby for changes in regulations. We’ve been fairly active on this front in recent years because we believe it’s an area where long-term investors can make a difference.

As founding members of the Board Diversity Hong Kong Initiative, we contributed to Hong Kong Exchanges and Clearing Market’s consultation paper (along with many others), pushing to ban single-gender boards over a three-year period. The proposed change came into effect in December 2021.

We also collaborated with the Asian Corporate Governance Association (ACGA) to publish an open letter to the Tokyo Stock Exchange (TSE), proposing a series of targets to encourage firms listed on the TSE Prime Market to achieve higher levels of gender board diversity in a timely manner.

In fairness, it isn’t always easy or possible to evaluate the effectiveness of an engagement program or initiative because influencing organizational culture takes time, especially when we’re trying to encourage a shift in mindset that’s tied to historical social values. In addition, each issuer’s sustainability journey—and indeed, challenges—are different.

As such, a market-by-market, case-by-case approach might be needed. That said, we’ve been able to be a part of positive change, supporting channels for open dialogue on these issues in at least two instances recently—in Mainland China and Malaysia. 

Exploring the idea of quotas for listed firms

The European Union’s (EU’s) experience in this area is perhaps instructive: Of the 12 EU member states that have achieved 30% female representation on listed corporate boards,³ 8 had already introduced gender quota laws and all 12 have incorporated gender diversity recommendations into their respective corporate governance code.

Last November, the EU moved to harmonize standards within the bloc and adopted the Women on Boards Directive, which stipulates that at least a third of a company’s board (or 40% of nonexecutive directors) are women. Firms listed within the bloc have until June 2026 to comply with the new directive. 

Source: European Commission, European Institute for Gender Equality, as of December 13, 2022. 

The main takeaway from Europe’s experience in promoting board gender diversity is that quotas can work; however, this approach isn’t without controversy. It’s a very blunt tool that can open the door to charges of tokenism, meaningless virtue-signaling, and—depending on the appointment vetting process—partiality. It’s also an approach that doesn’t always sit well with those of us who value the idea of meritocracy. That said, it’s undeniably effective, and as such, it could be more helpful to view quotas as a starting point. It’s an important first step to get qualified, deserving female executives a seat at the table.

For female board members to be able to contribute meaningfully to a company’s growth, it’s crucial that the right candidate is appointed. Regulatory safeguards can play a part here. Malaysia’s central bank, for instance, has published very detailed guidelines in regard to tenure, qualifications, and how it views independence.⁴ Enforcement is equally important; it’s perhaps no accident that Malaysia has the highest percentage of women board members in Asia.

India’s efforts in promoting board gender diversity over the past 10 years could also hold useful lessons for its neighbors in the region. All publicly listed firms in the country must have at least one female director on their board since 2013. A study of the 500 biggest companies listed on the National Stock Exchange of India revealed a very high level of compliance among member firms. Interestingly, four years after the rules were introduced, 13.6% of previously noncompliant firms had actually gone a step further and appointed two or more women to their board. In addition, the study showed that a majority of these new appointees are highly educated and highly experienced independent directors. In our view, the exchange’s efforts could be further enhanced if combined with guidelines on qualifications and independence. That said, it doesn’t change our main takeaway: Quotas could be a good starting point.

In our view, an easy way to move the dial further is to introduce stricter disclosure rules and require all listed companies to publish relevant metrics such as gender diversity ratios and communicate plans to address any observed imbalance. Such a development is likely to be viewed positively by investors and shouldn’t be seen to be overly burdensome. Many companies have already started to incorporate this data into their annual reports. Initiatives like these can enhance corporate transparency and establish a new data pool that will make it easier to set measurable goals and assess progress in an objective manner.

In search of meaningful progress: looking beyond quotas and targets

Introducing mandatory quotas may be an effective way to supercharge the board gender diversity initiative and boost the percentage share of female board members quickly; however, that’s just the beginning.

It’s equally important to examine the qualitative aspect of these appointments: Are they named to committees that can shape company culture and policy (e.g., compensation committees, nomination committees), or have they been appointed to nonexecutive committees whose activities have limited effect on the firm? According to the ACGA, companies with a female nomination committee chair are more likely to have more women on their boards. In Hong Kong, where the study was conducted, the ratio was 25:16. It’s an interesting finding that certainly makes interesting food for thought. 

Overlooked vs. overboarded: growing the talent pool

Given that the success of any business is predicated to a large extent on its ability to identify opportunities borne out of an imbalance between demand and supply, it’s perhaps ironic that the business community hasn’t applied the same lens to the availability of senior female executives. The shortage of qualified candidates has often been cited as a reason behind the lack of gender diversity on corporate boards, a persistent challenge that lies at the heart of overboarding. It doesn’t help that boards have a tendency to appoint individuals who are already directors of other boards.

In our view, this concern may be somewhat overblown; however, the solution is relatively straightforward: Companies should invest in establishing the relevant infrastructure and introduce initiatives to identify high-performing female executives who may not have received the recognition or the opportunities they deserved in order to advance their careers. Others, meanwhile, may not have received the coaching that they needed to move forward.

In other words, the only way to avoid overboarding is to grow the talent pool and support deserving executives who may have been overlooked. Where businesses are concerned, this means providing consistent—and often crucial—support to female executives throughout their careers so their growth trajectory isn’t affected by important life events such