Opinion | Hong Kong companies need action, not talk, on diversity

Hong Kong competes on its reputation as a well but lightly regulated market. This philosophy is reflected in the Hong Kong stock exchange’s listing rules, which lay out a world-class standard of corporate governance but interpreted in a light-touch manner. Regulators try to avoid adding onerous requirements to compliance standards, preferring to set out the principles of good corporate governance and allowing companies to “comply or explain”.

The market operator, HKEX, amended the Corporate Governance Code with effect from January 1, introducing a number of changes mainly to improve transparency and to keep the rules broadly in line with international best practice. One key change is an expectation to “promote board diversity, including gender diversity”. This will be achieved not through quotas or targets, as in many markets, but by the publication by each issuer of a diversity policy.

Board diversity has been a hot topic in discussions of corporate governance for a number of years. The debate has mainly focused on how to achieve a higher proportion of women on boards, though more recently other aspects of diversity, such as ethnic background or citizenship, have increasingly been raised. Some countries, particularly in Europe, have mandated gender diversity on boards. Britain has chosen to use voluntary targets, initially of 25 per cent women by 2015 and now 33 per cent by 2020.

Other than fairness, there are strong grounds to argue that diversity on boards, and in management more generally, is an important principle of corporate governance. Research has established a strong link between group diversity and the quality of decision-taking and risk-mitigation. Diverse teams tend to be both more effective and more innovative.

One recent study by Paul Gompers and Silpa Kovvali in the Harvard Business Review July-August 2018 edition made a clear link between diversity at venture capital firms and their financial outcomes. They studied all such firms in the US from 1990 and found that staff tended to be homogenous by gender, race and educational background. Only 8 per cent of employees were female and just 1 per cent were black. The success rate of acquisitions and initial public offerings was 11.5 per cent lower, on average, where the partners shared school backgrounds and 32.2 per cent lower where ethnicity was homogenous.

Given this strong evidence, it is surprising how boards globally remain relatively uniform. Egon Zehnder recently published its “Global Diversity Tracker 2018”. On average globally, there are 2.3 women per board, or 20 per cent of board strength. In the US, 22 per cent of directors are female, up from 20 per cent in 2012. Britain’s voluntary targets have delivered encouraging change: 28 per cent of directors are female, up from 18 per cent in 2012.