Board diversity for resilience and sustainability

AS we wind down for the year-end, it's apparent that we've grappled with Covid-19 for almost 2 years now, and it has no doubt been a trying period. The pandemic has no doubt put the resilience of individuals, organisations, and countries to the test. However, there have been positive developments during these times, such as a stronger focus on sustainability.

This focus seems to be driven by growing concerns around climate change and social issues exacerbated by Covid-19, a shift from shareholder to stakeholder capitalism, and an increasingly volatile, uncertain, complex, and ambiguous (Vuca) world. As scholars and policy experts have noted, world historical events (such as a pandemic) can lead to a search for new norms and ideas.

The call for a stronger focus on sustainability can be observed in the Singapore Exchange's recent consultation paper on climate and diversity. A key part of the paper states that an issuer must maintain a board diversity policy that addresses aspects such as gender, skills and experience, including making related disclosures in its annual report.

This requirement is not only sensible, especially in light of current times, it is also useful. As one of the key drivers of a company's long-term strategy, a diverse board can offer a cognitive diversity of perspectives in addressing a range of issues from strategy to corporate governance, to addressing social and environmental stewardship.

At the same time, the resilience of an organisation is important in order to face a Vuca world. Organisational resilience broadly comprises elements including innovation, strategic adaptability and brand reputation, and interrelates with sustainability.

Let's examine the issue - Can board diversity be a force for business sustainability and resilience?

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Why isn't diversity more widespread?

Information from the Council for Board Diversity shows that the percentage of women on boards continues to be on the lower side at 13.2 per cent (as at June 30, 2021) for all SGX-listed companies.

Through our interviews, we found that barriers to board diversity include the belief that a prospective board member's background, gender and demographic traits are of secondary importance to their skills and qualifications; that diversity is a plus but not a priority. Although most companies agree in theory that diversity is a good thing, potential unconscious bias coupled with doubt that diversity is truly that important, might lead companies to stay with the status quo.

In the past decade, there has been a growing body of academic research on how aspects of board diversity benefit dimensions of sustainability and resilience of businesses. While not all available research supported the hypothesis, the majority did reveal positive relationships between the 2. We highlight here some of the research insights.

In a 2018 study, Board diversity, firm risk, and corporate policies, regression analysis showed that board diversity had a positive and statistically significant effect on the quantity and quality of innovation for companies. Meanwhile, a 2018 Norway-based study How does job-related diversity affect boards' strategic participation found that acquired diversity and boards' strategic participation are positively and statistically significantly related.

A 2016 UK-based study also found that board gender diversity has a positive and significant link with sustainability reporting quality. Another study, from Yale on Gender differences in public understanding of climate change, showed that on average, a greater proportion of women worry about the threat of climate change and its effect on future generations.

In Singapore, a study on corporate governance conducted by the Centre for Governance and Sustainability found that board gender diversity has a strong positive and statistically significant relationship with overall corporate governance, as measured using the Singapore Governance and Transparency Index. Interestingly, when the sample was narrowed down to only independent directors, the study did find a direct positive relationship between female directors and firm profitability.

Diversity alone is not enough

While the secondary research above does point to positive links between board diversity and components of sustainability and resilience, our secondary research and interviews have also shown that the benefits of diversity can be diluted in certain instances.

Firstly, more board diversity could lead to cognitive conflict. Therefore, strong leadership from the chairperson and board culture is required to prevent cognitive diversity from causing polarisation and stymied decision-making. Another challenge is reaching a critical mass of diversity. For example, appointing a female director to an otherwise homogeneous board as a seeming token may not be beneficial.

Companies should also consider which aspect of diversity to focus on. Not all diverse traits will bring the same degree of benefit to the company and its context - for example, although a range of different industry backgrounds can help contribute different knowledge bases and networks, not all industry backgrounds may provide the same degree of benefit or even be relevant.

Hence the requirement from SGX to disclose the process on how board members are selected and what attributes they fulfil can be useful.

Finally, board members from different backgrounds and experience, that are relevant to the company's mission, must not only be present but must also be able to provide and contribute diverse views across areas such as business strategy, innovation, corporate governance, risk management, social and environmental matters.

We are at a unique point in corporate history where new norms are being established, including that of business sustainability. Board diversity, including gender diversity in Singapore, can be leveraged not only to strengthen business sustainability and resilience, but to inspire the next generation of boards in Singapore, and to place the republic firmly in the front carriage of the sustainability train.

The writer is ESG leader at PwC Singapore