As an investor, I am fine if companies dial down on diversity initiatives

LIVING in multi-racial, multi-religious Singapore – where people hail from diverse nationalities and many are foreign-born – is fun. One can celebrate various festive occasions, learn about disparate cultures and access different cuisines.

Crucially, too, Singapore’s diverse society is a strength for our businesses.

For example, penetrating regional markets is easier when a business can tap staff here who are familiar with cultural norms and behaviour in a target market.

Therefore, could the pushing back on diversity, equity and inclusion (DEI) initiatives within the US federal government, private companies and institutions by US President Donald Trump’s administration weaken US corporations?

DEI initiatives are intended to address and correct discriminatory policies.

The examples include implementing accessibility measures for people with disabilities, addressing gender pay inequity, expanding recruitment practices among under-represented demographics and holding anti-discrimination training.

Rolling back on DEI policies need not hurt US businesses if this contributes to cutting red tape and placing greater emphasis on merit in hiring and promotion.

After all, DEI policies may lead an organisation to hire a less-competent candidate or promote a less-able employee, so it can champion its success in embracing people from less-advantaged backgrounds or under-represented groups.

Perhaps, companies will do better to focus laser-like on building strong teams with competent people to sustainably deliver solid financial returns that will satisfy investors.

Board diversity

In Singapore, many leading listed companies embrace diversity, whether at the board or management level. There has been progress in the country, as female participation on boards of the top 100 listed companies rose to 22.7 per cent as at June 2023, versus 15.2 per cent as at December 2018.

A company that values board diversity might aim to have at least two female directors, board members from different age groups, and directors who have served differing tenures. Additionally, a company could look to have some directors with international experience.

In short, companies may take into account gender, age, tenure, ethnicity and geographical background when assembling a board. 

In turn, many companies believe that a diverse board helps to avoid groupthink and fosters constructive debate during deliberations. Indeed, embracing diversity might enable a company to benefit from all available talent and perspectives.

Still, I wonder if achieving board diversity is, at times, largely about box-ticking. Crucially, forming a team that can accept all available perspectives is tricky.

Should a board include members who live in a wide range of dwelling types? What about having greater representation on boards of non-graduates? Should the marital status of members and whether they have children or not be considered? 

The non-negotiables

As a shareholder of numerous local-listed entities, I am largely indifferent to companies’ efforts at achieving diversity.

Instead, what matters are sound financial performance, financial prudence, treatment of shareholders and ethical practices.

Delivering on financial performance is non-negotiable. A company that grows its profits will win the support of capital markets. Achieving competitive funding cost in turn gives a company an edge in growing its business.

Importantly, an investor in a listed group looks for total shareholder return (TSR), which can come from a mix of share price appreciation and dividends that a shareholder receives.

Delivering TSR hinges greatly on profitability; a highly profitable company will likely see its share price rise and be able to pay higher dividends over time.

Investing in financially prudent businesses matters hugely for retail investors like me who seek peace of mind. 

Interest rates can swing wildly and inflation can spike. Businesses may be prone to external shocks. Financial systems are not immune from turbulence. Regulations might change. Supply chains can be disrupted.

What I seek are companies that manage their finances soundly, have buffers to absorb shocks and some margin for errors.

Explanations of unforeseen developments that bring into question a company’s creditworthiness, or problems in a company’s cash flow, will hardly soothe shareholders who have placed their faith in the board and management.

The fair treatment of shareholders is a huge bugbear of mine. 

I hold shares in several deeply undervalued, asset-heavy groups. Some friends and associates mock me for having my money stuck in such investments. I hope such naysayers are ultimately proven wrong by boards of local-listed groups working zealously to unlock value in ways that benefit all shareholders.

For one thing, it would be good if opportunistic privatisation efforts by major shareholders at prices that do not reflect the full value of a business become a relic, and boards work persistently to reward all shareholders.

Ethics matter. Sure, the business environment can be tough and sharp elbows may be needed in the business world. However, while a business should aggressively pursue profits, unethical short-cuts are unacceptable.

Think of me as a long-term greedy investor. I do not want a group that I am invested in to be caught up in shenanigans that lead to the revocation of a business licence, or huge fines or irreparable reputational damage.

To me, a listed business does not need to do good by making financial donations or having staff engage in volunteering. Doing all that may only largely earn kudos for a company’s board and top management; such activities are best left to individuals to perform in their personal capacity.

What a business must do is uncompromisingly uphold ethical standards. A shareholder would be loath to read news that a company he is invested in engages in shady practices that go against his values.

Doubtless, building diverse teams can help a company in its pursuit of profit goals and in growing a strong corporate culture. Still, what should be avoided is the emphasis on gender or race over merit when selecting people.

As a long-time and long-term investor, I am fine if listed groups dial down on achieving diversity goals. With the tough environment, many businesses need to focus on managing a slew of higher-priority matters well to survive.