Tough stance on board renewal has helped to spur recruitment of more women directors

Here's some good news about diversity in Singapore’s boardrooms: At the 100 largest locally listed companies by market capitalisation, women occupied 23.7 per cent of all board seats at end-2023.The latest Singapore Board Diversity Review said this marked an improvement from 21.7 per cent at end-2022, and only 7.5 per cent at end-2013.

The annual study released earlier this month by the Council for Board Diversity also said the rate at which women are taking on board appointments has accelerated.

Last year, women accounted for 29 per cent of new board appointments at the 100 largest listed companies. Back in 2013, women took up only 5 per cent of new board appointments.

At the end of last year, a record 48 per cent of these 100 largest companies had boards with at least 25 per cent female participation – significantly higher than at end-2022, when only 39 per cent of these companies met this benchmark.

The report said these statistics indicate that it is not difficult for locally listed companies to recruit suitable women directors once they are committed to doing so.On the face of it, there is broad support for the idea of diversity on corporate boards. In 2021, almost all respondents to a public consultation by Singapore Exchange Regulation (SGX RegCo) agreed that local issuers should come up with a board diversity policy and disclose it in their annual reports.

“The respondents recognised the benefits of a diverse board, and cited that more impetus is needed to increase issuers’ commitment to board diversity. Respondents were also of the view that disclosing the board diversity policy would foster better investor confidence and address the growing shifts by investors, especially institutional investors, towards greater diversity on boards,” SGX RegCo said, in a paper following the consultation.

“Almost all respondents agreed that gender is a visible form of diversity that is widely tracked by investors globally and should be encapsulated within issuers’ board diversity policy,” SGX RegCo added.

Following a public consultation, the disclosure of board diversity policies was added to the listing rules for financial years starting in 2022.

Yet, some of the progress on gender diversity in Singapore’s boardrooms may have been the result of a less popular change to the listing rules – one that was introduced to foster board renewal.

This could hold an important lesson for market regulators setting policies aimed at enlivening the local market. The key to achieving this popular objective may lie in the adjacent field of preventing companies from being taken private for a fraction of their intrinsic value. Board renewal drove diversity. The Singapore Board Diversity Review said the recent increase in female board appointments at locally listed companies was likely driven by regulatory factors. Besides companies having to make board diversity policy disclosures since 2022, a hard nine-year-cap was imposed at the beginning of 2023 on the tenure of independent directors (IDs).

Prior to that, IDs were allowed to be reappointed beyond nine years under a “two-tier vote” – that is, a resolution voted on by all shareholders, and a separate resolution voted on by shareholders excluding the company’s directors, CEO and their associates.

An ID who failed to get through a two-tier vote could still continue serving on the company’s board as a non-ID. At least one-third of the company’s board would still have to comprise IDs, though. SGX RegCo grew concerned that the “two-tier vote” was being used too frequently to keep IDs beyond nine years. A study by Nanyang Business School found nearly 70 per cent of the 391 long-serving IDs that were up for re-election in 2021 were put up for election through a two-tier vote.

In 2022, a public consultation on imposing the hard nine-year-cap to better facilitate board renewal was held. The minority of respondents who objected were predominantly directors and issuers. Among their concerns was that finding new ID candidates would be challenging, because of low directors’ fees and a limited talent pool in Singapore. As it happened, the hard nine-year-cap resulted in companies having to take a chance on first-time directors. This, in turn, led them to advance their board diversity agendas.

Last year, first-time directors accounted for 66 per cent of all new appointments to the boards of the 100 largest companies in the Singapore market, according to the Singapore Board Diversity Review. First-time directors made up only 47 per cent of new appointments in 2022.

Of the record 71 first-time directors appointed last year, there was one woman director for every two male directors.

Will benefits shine through? The big question is whether this new generation of IDs, and the growing number of women among them, will necessarily lead to more independent and effective corporate boards.

As an investor, I am skeptical. IDs are essentially recruited by a company’s controlling shareholders and management. They do not personally have any incentive to question the company’s business strategies or push for the monetisation of its idle assets.It seems unlikely to me that the growing number of first-time IDs and women IDs will necessarily result in locally listed companies garnering better market valuations, or staunch the flow of companies being taken private for much less than the value of their underlying assets – at least, not without other forms of regulatory action. This column has previously argued that market regulators ought to adopt a more prescriptive stance on the manner in which companies are valued in take-private transactions, especially when the company in question holds assets that have plainly visible private market valuations. For example, would it be fairer for minority investors if market regulators required real estate companies to be valued at a minimum of their net asset value when they are taken private?

This would reduce the incentive for controlling shareholders to attempt taking their companies private, versus enhancing the public market value and trading liquidity of those companies.

With the interests of controlling shareholders and minority investors brought into better alignment by such prescriptive rules, the full benefits of refreshed and more diverse boards might shine through.

Just as SGX RegCo’s tough line on board renewal helped spur greater participation by women directors, a stricter approach in take-private deals could result in value-unlocking initiatives that benefit minority investors and lead to a more vibrant market.‘

Source: The Business Times