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Blog | 29 Oct 2020

To Quota or Not to Quota: Reflecting on the Way Forward for Board Diversity in Hong Kong

This opinion piece forms part of our IMPACTxAsia blog series

To Quota or Not to Quota: Reflecting on the Way Forward for Board Diversity in Hong Kong

Is it time for gender quotas on boards in Hong Kong? Sadly, this question is worth asking as progress in board diversity continues to stall on the Hang Seng Index. As of July 2020, women occupy only 13.7% of board seats – the same level as in 2018.

Contrast Hong Kong with other advanced economies in Asia, and we see a widening gap. In Singapore, 16.2% female participation was recorded on the largest 100 primary-listed companies on the Singapore Exchange by the end of last year, up by 1% in 2018. In India, 17% of board seats in Nifty 500 companies were filled by women as of March 2020, increasing by 3% compared to two years ago.

More needs to be done to lift Hong Kong out of stagnation. Under this context, last month Community Business hosted a panel discussion on board diversity with two guest speakers:

  • Elaine Cheung, Board Trustee of WWF International, Independent Non-Executive Director of Pacific Legend Group Ltd, holding company of Indigo Living and Audit Committee of UN World Food Programme
  • May Tan, Independent Non-Executive Director of CLP, LINK Asset Management, HSBC Insurance, MSIG Insurance HK, Anticimex Topholding AB and Home Credit NV

In the discussion, our speakers reflected on the progress in Hong Kong and potential interventions that might help move the needle.

Businesses Need to Move with the Times

Lack of board diversity is often attributed to the attitude of local family businesses that dominate the Hang Seng Index. In May’s experience, these companies tend to see board diversity as a nice-to-have rather than a business priority. To pursue this would mean going beyond their close networks to appoint outsiders to fill the board seats. This is often met with pushback, as the chairman (often also the company founder) tends to believe that they know what is best for their company.

However, the macro-environment is prompting change. May added that trade activities in Hong Kong today are no longer dominated by small customers but international institutional funds. Companies face higher expectations from institutional investors to champion diversity, particularly at the board level. Amid the social and political turmoil around the world, people want to see businesses not only make profits but also solve societal issues, according to Elaine. It is increasingly costly to avoid the role of board diversity in the broader ESG context, given where the world is heading now. If businesses in Hong Kong remain resistant to change, they risk being left behind on the global stage.

To Quota or Not to Quota

With all that in mind, would imposing a quota be a good way to advance board diversity in Hong Kong? The short answer according to both our speakers is yes, but with a few caveats. Elaine summed it up: “Quotas could only work together with improvement in governance.”

Specifically, their recommendations include:

  • Introduce a gender quota for IPOs. In the words of May, “IPO is the easiest place to start as you need to staff a new board. The current ‘comply or explain’ approach is insufficient to address the lack of diversity on boards, as businesses tend to be able to get away with boiler-plate explanations drafted by their lawyers.”
  • Standardise the board selection process. Historically, reliance on personal networks has limited the opportunities for board candidates, particularly women who lack direct experience or are not in the same ‘old boys’ club’. Introducing a structure to the selection process pushes companies to evaluate the current gaps in skills and diversity and consider candidates who fill these gaps.
  • Provide a timetable for listed companies. Specify that in the next five years or upon the next director’s retirement, the company should consider refreshing their board with more diverse skill sets and experience.
  • Provide listing rules to limit the term for INEDs. There are currently no strict rules in Hong Kong, unlike other markets where there tends to be a maximum of three terms of three years. With such a rule in place, companies will be required to look for new independents every nine years, which will open up more opportunities for candidates.

Reflections

It was interesting to observe how the perception towards quotas has shifted. In 2012, Community Business was against quotas when we provided recommendations for board diversity measures to Hong Kong Exchanges and Clearing. We maintain that quotas alone may undermine meritocracy, and should not be taken as the panacea to board diversity. A case in point is India, where some family-run companies have sought to meet the gender quota by filling the board seats with female family members who lack the skills or knowledge – a practice that inadvertently leads to tokenism.

Fast forward to 2020, people are warming to the idea of quotas. Earlier this year, Teresa Ko, China Chairman of Freshfields Bruckhaus Deringer and steering committee member of the 30% Club Hong Kong, expressed her support for “a hard target of 40 per cent women by 2026”. In a live poll at our panel discussion, a whopping 91% of the audience believed that it was time for quotas on boards in Hong Kong. Even Elaine and May both said that they would have opposed to the idea several years ago, but they had since changed their mind as they saw little progress in board diversity after years of advocacy.

Today the discussion is going beyond whether Hong Kong should introduce a quota, but how best to impose it to drive meaningful change. As we see more conversations around this, action needs to follow. Whether companies are ready or not, there is a need for change – and an appetite for stronger interventions in Hong Kong.

 

About the Author: Cora Mok, Programme Manager, DIAN