DIVERSITY IN THE BOARDROOM

Transcription

1 DIVERSITY IN THE BOARDROOM DR.SHANTHY RACHAGAN LLB(HONS), CLP,MBA,LLM,PHD ASSOCIATE PROFESSOR/ BBUSCOM COURSE DIRECTOR SCHOOL OF BUSINESS / FACULTY OF BUSINESS AND ECONOMICS MONASH UNIVERSITY Shanthy.Rachagan@monash.edu

2 AGENDA Introduction Definitions and Demographic Literature Current State of Diversity Encouragement of Diversity Conclusion

3 ROLE OF BOARDS Boards of directors play a central role in the governance of companies. The board has the ultimate responsibility on behalf of shareholders for the direction and performance of a company. The boards of companies, particularly public listed companies, are accountable to investors and others in the performance of their duties.

4 WHY DOES IT MATTER WHO IS ON THE BOARD? In a challenging and evolving commercial and legal environment, a company needs to attract well-qualified individuals who can work together as directors to further the company s interests. Consideration needs to be given to the range of personal talents and experience required to meet the needs of the company and the dynamics of an effective board.

5 Agency theory principal agent Upper Echelon theory (Humbrick and Mason, 1984) Management s demographic characteristics influence the decisions they make and the actions they take. Gives rise to the difference between homogeneity and heterogeneity

6 ECONOMIC CASE FOR DIVERSITY Improves ability of the board to monitor managers due to increased independence. Improves decision-making of the board due to the unique new perspective, increased creativity. Improves information provided by the board due to the diverse directors. Diverse directors provide access to important resources in the external environment. Send important positive signals to the labour market, product market and financial market.

7 INTERNATIONAL POLICY DEVELOPMENTS Public interest in the degree of diversity in the board has been largely directed to gender. Similar issues may arise in relation to ethnic background, age or other aspects of differentiation. Some recent cross-sectional studies suggest a positive relation between board diversity and firm value. A number of countries have enacted policies to encourage board diversity. 2003, Norway enacted legislation board gender quotas for all public sector companies. 2006, Spain with an intention to ensure greater gender equality at work and have increased diversity in political, economic, social and cultural life.

8 EU plans tough quotas to put women in the boardroom Justice commissioner Viviane Reding says equality will take another 40 years without tough action March 2012

9 EU Since the final quarter of 2003, the share of women on boards has risen from 8,5 % to 13.7 %, an increase of 5.2 percentage points in a little over eight years. This represents a slow average rate of change of around 0.6 percentage points per year

10 CROATIA Within the framework of politics, the National policy for gender equality (Official Gazette, 88/2011) is especially important. As written in the Policy (Article 1), it is the basic strategic document of the Republic of Croatia which it has adopted in order to eliminate discrimination against women and to establish genuine gender equality by the implementation of the policy of equal opportunities. Among others, it: covers the area of creating equal opportunities in the labour market, introduction of gender-sensitive education and upbringing, and the balance of the participation of women and men in decision-making processes.

11 The Croatian Bureau of Statistics (CBS) reports indicate that women in Croatia continue to have lower labour market participation rates, higher unemployment rates and significant pay differences compared to men. In 2010, women in Croatia represented 53.2% of the population aged 15 and over. However, they participated with 45.9% in the labour force; out of that figure, 45.6% were employed and 48.6% unemployed. Female activity rate and employment rate were less than male rates (40.0% vs. 53.5%; 35.2% vs. 47.6%, respectively), whereas the unemployment rate was higher (12.2% vs. 11.0%) (CBS, 2010, p. 34). They are less paid for their job (CBS, 2011, p. 39).

12 MALAYSIAN DEVELOPMENTS 2011: Cabinet Women must comprise at least 30% of those in decisionmaking positions, encompassing boards, in the corporate sector. Companies have been given five years to meet this requirement. 2011: Securities Commission Corporate Governance Blueprint for Malaysia Premise: there is better corporate governance with diversity Promotes greater diversity, including the gender composition of board of directors in public listed companies

13 ARE SUCH POLICIES APPROPRIATE OR NEEDED IN MALAYSIA? Our research looks at diversity of the board in the top 50 PLCs in Malaysia, drawing on recently compiled unique data sets. We discuss the need for diversity and suggest ways to encourage diversity in the board to meet the government s 5 year implementation plan.

14 : DEFINITIONS AND DEMOGRAPHICS Marimuthu: two ways that diversity can be understood: a) demographic or b) cognitive Demographic diversity includes gender, age, race and ethnicity. Cognitive diversity includes knowledge, education, values, perception, affection and personality characteristics. The two understandings are often confused in the corporate governance literature. Maran, M. (2008) Ethnic Diversity on Boards of Directors and its implications on Firm Financial, The Journal of International Social Research, Volume 1 (4), , at 432.

15 COGNITIVE OPENNESS When utilitarian arguments for diversity are advanced, it is assumed that demographic diversity on a board brings cognitive diversity. Cognitive diversity has little impact without cognitive openness on behalf of members of the board. Mitchell et al. define openness to cognitive diversity as (a) the way in which individuals approach the different perspectives and knowledge of other group members and (b) incorporate the view that others should be allowed to freely express their differing views, the belief that there is value in others knowledge and objectives and the perception that there is merit in using the best of others ideas.

16 INTERNATIONAL DATA Strong and robust correlation between firm performance and board diversity found in the international data. Carter et al. (2003) and Adams and Ferreira (2003) find a positive relation between the percentage of women on the board of directors and firm value as measured by Tobin s q. Erhardt et al. (2003) find evidence of a positive relation between percentage of women and minorities on boards of directors and return on assets and return on investment. Although not focusing on the composition of corporate boards, Ellis and Keys (2003) find that firms that appear on Fortune s list of top diversity promoting firms from 1998 to 2002 experience positive, significant abnormal returns on the announcement date. Catalyst (2004) analyzes 353 Fortune 500 companies from 1996 to The report documents that the 88 companies with the highest representation of women on their top management teams experienced significantly higher returns on equity and total return to shareholders when compared to the 89 companies with the lowest women s representation.

17 Some evidence of negative correlation: Contrary to their own expectations, Shrader et al. (1997) find some evidence of a significant negative relation between the percentage of female board members and certain accounting measures of performance for a sample of approximately 200 Fortune 500 companies in They concluded that it may be necessary for a firm to achieve a critical number of female board members before they can exert positive influence, whereas in their sample few firms had more than one female board member. Their explanation, however, does not account for the negative finding.

18 FEMALE PARTICIPATION ON THE BOARDS Australia 8% UK 11.5% Canada 13% Croatia 14.5% USA 15.2% on the top Fortune companies in the US Norway 44%

19 CROATIA 2011: Law on gender diversity scope: all listed companies and some private companies meeting some criteria calendar: 20 p. cent by 2014, 40 p. cent by 2017

20 MALAYSIAN DATA Maran Marimuthu and Indraah Kolandaisamy, 2006: Regression analysis from Top 100 Malaysian listed companies from the non-financial sector were selected for this study over the period 2000 to 2006 with two different dependent variables (ROA and ROE): gender effect did not have any impact on firm financial performance throughout the years except in year 2005 ethnic diversity did create some significant impact on financial performance in the second half of the period from 2004 to 2006

21 OUR HYPOTHESES Hypothesis I Gender diversity will not have a significant impact on firm performance measured by Tobin s Q. Hypothesis II Ethnic diversity will have a significant impact on firm performance of the firm as measured by Tobin s Q. Hypothesis III Age diversity will not have a significant impact on financial performance of the firm as measured by Tobin s Q.

22 TOTAL NUMBER OF MALE AND FEMALE DIRECTORS COMPARED Year Male Female Total

23 0,0800 Average Ratio of Female Directors/all Directors 0,0700 0,0600 0,0500 0,0400 0,0300 0,0200 0,0100 0, Female Directors

24 POLICY IMPLICATIONS

25 POLICIES SHOULD BE BASED ON INSIGHTS RE CAUSES OF CORRELATIONS Though studies suggest a positive link between diversity and corporate performance in the countries in which studies of this type have occurred, the reasons for this correlation are not clear. More recent management literature suggests that demographic diversity without cognitive diversity may not be helpful. While a mix of backgrounds and perspectives may beneficial on a board, there needs to be some common purpose and ability to work together. There is no ideal composition of a board. The number and mix of directors is a matter for consideration by each company in the context of its own business and needs.

26 ASX ELEMENTS OF AN EFFECTIVE BOARD 1.Personal Talents It is vital to ensure that the portfolio of skills available at the board table is optimal in terms of the company's business model and strategic direction. Elements of An Effective Board 3.Needs of the company Size and composition of a board is a matter of judgment by each company, having regard to its nature and needs 2. Dynamics of the board A well functioning board is one that has a level of coherence between members and is able to reach a board position without animosity. 4.Board review and succession planning A well functioning board requires ongoing review of its performance and consideration of current and anticipated changes to the business

27 HOW TO ENCOURAGE DIVERSITY? A starting point: make the appointment processes more transparent and to formalise their processes for keeping board composition under review in the light of performance and changing needs. A board that actively reviews its continuing capability, and is prepared to turn over directors as may be required, is more likely to be open to new talent than one that regards directors, once appointed, as entitled, in effect, to continue in that role from term to term. More transparent board processes, and more information about the reasons for putting forward new directors, will assist shareholders in questioning a board s approach or in voting on board appointments.

28 BOARD STRUCTURE The Selection Process The board should establish a nomination committee for board selection. Information for shareholders voting on candidates for the board Names of candidates submitted to shareholders for election as directors be accompanied by additional information including, Biographical details Details of relationships between candidate and the company; Particulars of other positions which involve significant time commitments Directorships held On-going evaluation and disclosure Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.

29 Skills development A conspicuous issue on board membership among Malaysian companies is the lack of gender and age diversity. Therefore: Targets (as opposed to quotas) for the number of women in middle and senior levels of management, corporate boards and academia; Creating a database of suitably qualified women for selection by private sector companies to sit on boards of directors; Improved targeting of women for management development; Increased funding for agencies promoting diversity in management and the workforce generally

30 Possible Steps Various steps must be taken to assist a more diverse group to develop the skills that would enable them to take up board positions. These include mentoring programs and adoption of more accommodating employment practices at executive management level. Mentoring in management An approach that has been successfully adopted in the UK, France and Canada to boost women board members is the promotion of mentoring or other networking programs for women in management. Career advancement practices Studies suggest that there are still barriers to women seeking to undertake or advance in senior managerial roles. There is scope for companies or industry groups to show leadership in addressing these barriers through for example with regard to flexibility in working arrangements for managerial staff and ensuring that promotion policies do not unfairly disadvantage women.

31 Q & A THE END