China and HK must continue efforts to improve board diversity

December 11, 2020 10:47

The benefits of corporate board gender diversity in supporting high-quality debate and decision-making are well-known. While we are still far from having truly gender-balanced board membership in the corporate world, we are seeing progress made, particularly in Europe and U.S. In the UK, women make up 33.5 per cent of FTSE 100 board members and, recently in Germany, the government agreed to a mandatory quota for women on boards of listed companies: under the new ruling, management boards with more than three members must include at least one woman.

Nasdaq has just announced that it has asked the Securities and Exchange Commission (SEC) for permission to require the 3,000 companies listed on its U.S. stock exchange to have at least one woman and one person who identifies as underrepresented or LGBTQ on their boards. It also wants its listed companies to publish board diversity reports. Not only is this a meaningful move by a major exchange to promote diversity and inclusion at board level, but it could also have a positive impact on diversity at major tech companies, where women are still outnumbered by male counterparts.

In Asia – and Hong Kong and Mainland China in particular – though, the picture is quite different. The percentage of women on the boards of companies in the Hang Seng Index (HSI) is 13.1 per cent. Of the 50 companies in the HSI, 12 still have all-male board membership. According to MSCI ESG research 32% of the Chinese companies in the MSCI ACWI Index had all-male boards last year.

While not the only measure of diversity, we strongly believe that diversity of gender better equips a board to more effectively serve a company and its stakeholders. Federated Hermes believes that the purpose of investment is to create wealth sustainably over the long term, so our engagement is focused on helping companies to be more responsibly-governed in order to increase the potential for us to achieve this, while simultaneously seeking to improve the lives of employees, promote inclusion and safeguard the environment - all factors that drive financial performance. We assess diversity at both board and management levels to ensure that the leadership team has a suitable combination of talents to help deliver long-term value.

It is against this backdrop of gender inequality at board level in Mainland China and Hong Kong that we have gone a step further to strengthen our expectations on gender diversity, in line with revised corporate governance codes in both markets in 2018 (see for China, Hong Kong). Our updated Corporate Governance Principles for China and Hong Kong includes guidance for companies to have at least 20% women by 2021, and 30% within the next 10 years.

Putting our principles into practise, Federated Hermes EOS advisors may recommend a vote against the chair and members of the nomination committee (or if the company does not have a nomination committee, we may recommend a vote against the chair of the board), if the company fails to demonstrate that a credible plan is in place to meet these expectations. In this year alone we have voted against directors of China Mobile, AIA, Power Assets and Geely Auto due to gender diversity concerns.

Engagement in action: Tencent

To demonstrate how engagement with corporates can help drive diversity, we can look to an example set by Tencent. While women represent 50% of employees among China’s technology giants, they are underrepresented in management. There is also limited availability of technical and leadership roles. This was evident at Tencent which, from its listing in 2004 until Q3 2019, had a 100% male-dominated board.

Last year, the EOS team engaged with Tencent’s senior legal counsel and made recommendations on how to construct criteria in its recruitment activities to encourage fairer and non-discriminatory practices. In addition, we asked the company to consider reflecting its customer base and business needs when selecting board directors, given that a significant portion of customers are women. Female entrepreneurs and customers are also very active on its communications platform, WeChat, which bolstered the argument that improving gender diversity on the board was a timely and important issue for the firm.

In August 2019, Tencent successfully appointed a female director to its board. Today, it continues to roll out a diversity policy that is designed to ensure that the board has the appropriate balance of skills, experience and diversity of perspective, to support and take the company forward. Work continues to strengthen board level independence and oversight. In the near future, Tencent should be able to demonstrate a more transparent nomination process.

Small steps to making a big difference

Our engagement with Tencent to support gender diversity on the board was a positive one, and there are other examples among Mainland Chinese and Hong Kong firms that also demonstrate progress in this area. In May 2019, the Hong Kong Stock Exchange strengthened its ESG rules and now requires companies wanting to list on the exchange to explain why there is lack of diversity on the board and then how and when gender diversity will be achieved after IPO.

We are also advocates of the Hong Kong Board Diversity Initiative, of which Federated Hermes is a signatory, and, as a member of the 30% Club, we support its campaign to increase the percentage of women directors on company boards to 20% by 2026.

Diversity beyond gender

Gender can be a proxy for diversity in terms of thoughts and culture, but diversity is more than just gender. Boards should seek diversity more broadly and include ethnicity, nationality, sexual orientation and age, as well as gender, to more accurately reflect employees, customers, and suppliers.

We welcome the steps taken by companies in Mainland China and Hong Kong to acknowledge and commit to addressing racial or ethnic inequity. There are 55 different ethnic minority groups officially recognised in Mainland China and Hong Kong is home to a mix of ethnic minorities from across Asia and other parts of the globe, which in total makes up around 8% of the population of the territory.

Companies should identify any areas of biases and discrimination in hiring and promotion and should endorse policies and processes that encourage more cultural integration in order to create a more inclusive corporate culture. We support the aspiration that board members, together with all levels of management, should broadly reflect the diversity of society in which it operates. Banking giant HSBC Holdings is one example where the make-up of nationalities and ethnicity on the board could be rebalanced to better address its geographical business priorities.

Our experience has shown that constructive dialogue between companies and committed, long-term investors on gender parity can improve the governance and therefore the performance of companies in the region. While there is still much to be done to balance the scales in terms of gender representation on company boards in Asia, there are encouraging signs of progress being made in Mainland China and Hong Kong. It is our hope that firms and their directors will continue to engage on this issue to help identify areas of bias and discrimination and to set priorities for promoting greater diversity, and ultimately promote long-term value for investors.

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Head of Stewardships, EOS at Federated Hermes