ESG Insights

How you get there matters

The elusive quest for gender parity among the boards of Singapore-listed companies has drawn a call for a new strategy: Search better.

In an opinion piece, Seah Gek Choo, Deloitte Southeast Asia and Singapore boardroom programme leader, and Terence Lam, director for advocacy and professional standards at the Institute of Singapore Chartered Accountants, put most of the blame on companies “not holistically considering their board candidates from a broader talent pool”.

Companies need to move past their preference for candidates with chief executive officer experience to include other C-suite expertise, they said. Looking beyond gender diversity, companies should also consider a diverse mix of skills, backgrounds and capabilities.

The focus on search processes could be a powerful shift in the market’s approach towards board diversity and gender parity, but the authors can perhaps go further than just looking at skill sets. Instead of aiming diversity targets at board composition percentages, companies might make better progress if more targets and processes were applied to how candidates are found and assessed

A point of pride among Singapore’s board gender diversity movement has been the progress made without a national quota. Data by the Council for Board Diversity (CBD) showed that women held 23.7 per cent of board seats among the 100 largest Singapore-listed companies as at December 2023, significantly better than the 7.5 per cent participation rate 10 years earlier

One of the driving forces behind the progress has been a regulatory requirement to disclose diversity policies, including targets. But despite that requirement, diversity outside of the largest companies has been slow. As at end-2023, women held only 16.1 per cent of board seats among all Singapore-listed companies. Furthermore, 43 per cent of boards outside of the top 100 listed companies have no female directors

It might be time to consider shifting the focus away from the eventual board composition and towards how search and assessment are carried out.

An important reason to do so is to avoid the trap of reaching the numerical target but getting there the wrong way. If companies appoint female directors just to meet a target, that raises the risk of underqualified token appointments and nepotism. As CBD points out on its website, “meeting quotas does not guarantee that benefits follow”.

What might a process-centric diversity policy include?

• Diversity targets for candidate slates. One of the most cited reasons for the under-representation of women on boards is that nomination committees are drawing from a small pool of potential candidates. This leads to the mistaken perception that there are not enough women directors. To address that, leading search firms in Singapore have developed a “Statement of Good Practice” that states “search firms should ensure that 20 to 25 per cent of the candidates are women” during executive searches. That percentage should perhaps be higher, given that research suggests 30 per cent is the critical level at which members of under-represented groups are judged more fairly. Nominating committees should also commit to that threshold.
• Diversity training for directors. Even a diverse pool of candidates can be defeated if the assessors cannot overcome their biases. Ensuring that nominating committee members – possibly all board members – receive adequate training about diversity, equity and inclusion can help to overcome those prejudices.
• Pro-active and continuous searches. A US study into higher education diversity hiring practices found that hiring pools were improved and more diverse when the search wasn’t only handled by a search committee when a need arose. The suggestion is to get every board member – even those not on the nominating committee – to see it as part of their responsibility to be on the lookout for potential candidates all the time, and to add those candidates to a constantly-refreshed list. This not only maintains a wider pool that can be tapped in times of need, it also ensures that the search pool overcomes limitations and biases of the nominating committee.

A diversity policy focused on processes can still include board composition targets to ensure that progress is sufficiently ambitious. But because the processes are more robust, companies and stakeholders will have greater confidence that when they do reach their goals, they would have gotten there the right way.

Supporting the stretch

The most beautiful rule in the world is meaningless if nobody follows it.

That’s the principle that some policymakers are having to confront on environmental, social and governance (ESG) matters as well-intended rules written in the past come up against implementation challenges.

In the United Kingdom, the Financial Conduct Authority has had to extend the October deadline for funds to meet a requirement on naming and marketing rules aimed at reducing greenwashing.

European businesses are moving investments and operations away from the European Union – where they grumble that stringent ESG rules are hurting competitiveness and depressing valuations and bottom lines – to less demanding jurisdictions in the latest version of sustainability regulatory arbitrage.

It’s important that South-east Asian policymakers learn the right lessons.

The easy reaction is to dial back on ambition. For example, pushing too hard for costly decarbonisation can alienate voters, hurt incumbent industrial sectors and deplete national coffers. Planetary boundaries need to be balanced against social ones, and it’s reasonable for transition pathways to be informed by what’s realistically achievable given existing constraints and resources.

But it’s also true that the capacity for change is not set in stone. Instead of lowering ambitions, policymakers could potentially achieve better outcomes if they paired stretch targets with credible strategies to reach them.

That’s why capacity-building and ecosystem development projects like Singapore’s Project Greenprint, which aims to build a national ESG database, or the Asean-Interconnected Sustainability Ecosystem, an ESG data collaboration between Bursa Malaysia, Indonesia Stock Exchange, the Stock Exchange of Thailand and Singapore Exchange, are important aspects of policy implementation.

Sustainability reporting will test the region’s ability to aim high and build a strong bow. As large customers increasingly green their supply chains to address expanded emissions reporting requirements and meet carbon pricing regulations in their home markets, the region’s small and medium-sized enterprises will need to better account for their carbon footprint or large swathes of the economy could be disadvantaged in international trade.

Policymakers will need to set standards that keep the companies competitive globally, while also providing the support to help companies comply.