The Hong Kong stock exchange announced last Friday that it is proposing a change to the corporate governance code which, if enacted, will affect all companies listed on its exchange. It proposes requiring all companies to establish a policy on board diversity and to report on this in their corporate governance and interim reports. Listed companies will need to comply; if they don't, they will need to explain why they haven't.
This is a huge milestone for Hong Kong. It's a recognition that the recruitment of board directors on the basis of meritocracy, plus diversity, tends to result in better corporate performance, as is evident from research around the world.
The move will raise governance standards and encourage transparency about company boards. The approach is similar to steps taken last year in Australia. It is also in line with the global trend of countries encouraging (and in some case mandating) companies to adopt board diversity.
When companies think about diversity of perspectives, they look at the experience and skills of board candidates but they also tend to look at differences based on gender, culture and race, age, sexual orientation and gender identity, disability and religion. Some of these indicators are easier to quantify, and therefore to report on, than others - gender being the obvious example.
The lack of women leaders in Hong Kong has been a recurring topic of discussion. An often cited reason (by men) for the low number of women on boards is that there are too few "board-ready" women. Research just conducted by the HKEx on its 1,500 listed companies proves that this is simply untrue. There are 1,216 women who already have listed company board experience in Hong Kong and 91 per cent of them sit on only one board.
In addition, there are scores of women who have board experience in non-governmental organisations, civil society and academia, some with private-sector experience. While I am not suggesting that we encourage multiple directorships, this does shed light on the ample supply of women with board experience available today in Hong Kong.
From the HKEx research, it is also clear that women directors tend to be executive directors. Of all female directors, 54 per cent are executive directors - compared with 44 per cent of all male directorships.
This is in stark contrast to what we see with the main board (the Hang Seng Index), comprising only 48 companies, where only 26.3 per cent of all women directors are executive directors. Companies that promote women to senior positions based on merit are more likely to have a higher incidence of women executive directors. These companies are also creating a pool of board-ready women to become non-executive directors for other companies in Hong Kong and abroad.
The real question for chairmen is: do they understand the benefit of having diverse perspectives on a board? Do they recognise that having a diversity of views will lead to richer discussions and better decisions than the current practice of "group think"?
Time will tell whether this proposed provision will become just another reporting indicator or an impetus for real and sustainable change towards a more open and open-minded nomination and selection process. The latter would require board directors to go beyond their existing networks and proactively search for a diverse array of candidates.
This can only be good for corporate governance and for Hong Kong.
Shalini Mahtani is founder and board director of Community Business. Shalini@communitybusiness.org