Hong Kong's Old Boys Club Is Living on Borrowed Time
(Bloomberg Opinion) -- Hong Kong’s cozy all-male boards have been put on notice. Rules that could become effective within months will force them to appoint at least one woman director. It’s an overdue change that may go some way to bolstering the city’s dented status as an international financial center.
The territory is an embarrassing laggard in the worldwide trend toward greater gender diversity. The proportion of female directors in Hong Kong companies that are constituents of MSCI’s flagship global equity index grew marginally to 12.7% last year from 12.4% in 2019. Granted, that’s far from the worst in Asia. But the city trails well behind London and New York, the global financial hubs to which it aspires to benchmark itself — and the gap is widening. Last year, 34.3% of directors of U.K. companies on the MSCI ACWI were women; the ratio for the U.S. was 28.2%.
Blame Hong Kong’s clubby world of family-controlled and male-dominated businesses. Close to a third of the city’s 2,500-odd listed companies had no women on the board as of the end of 2020. Many directors hold multiple board seats across different businesses, creating a semi-closed and self-perpetuating world driven by relationships. Resistance to change is finally meeting the greatest of market incentives: money. Environmental, social and governance issues are becoming increasingly important for global institutions with trillions to deploy, and they have elevated board diversity to a key investment consideration. Hong Kong can no longer ignore the ESG train.
Hong Kong Exchanges & Clearing Ltd. plans to bar single-sex boards while giving companies a three-year transition period to comply; a market consultation on the proposed rules is scheduled to end in mid-June. More gentle efforts at persuading companies to look beyond the usual suspects have plainly failed. “Clearly, it's not enough, but it's a baby step forward,” Teresa Ko, China chairman at law firm Freshfields Bruckhaus Deringer and a former chair of the Hong Kong stock exchange listing committee, said in an interview. “Hopefully it's a tipping point, and change will accelerate from here.” Ko has advocated for a 40% quota to be implemented within six years.
Quotas are a sensitive subject. Some see them as an infringement of property rights; shareholders own the company, and should have the power to appoint whomever they see as best qualified to direct the business, in this view. The exchange avoids use of the word in its consultation paper, though in effect its proposal amounts to a one-woman quota (the requirement is gender-neutral, meaning that an all-female board would also be deemed unacceptable — though, needless to say, there aren’t any in Hong Kong).
Ko herself says she used to be against quotas before the slow pace of progress changed her mind. A February report by the Hong Kong Institute of Chartered Secretaries, or HKICS, fairly oozed with frustration, describing the situation as “lamentable,” “extremely poor,” “unjust and unjustifiable,” and “snail-paced” in the speed of change.
A secondary objection to quotas is that companies may say they struggle to find enough suitably qualified candidates. To quote a recently elected male political leader: C’mon man. Women accounted for 67% of members of the chartered secretaries’ institute as of the end of 2019. They also make up a majority of the Hong Kong Institute of Certified Public Accountants. Female students represented about 53% of all students enrolled in higher-education programs in 2020 — and 58% of those in business and management studies, according to the HKICS. And about 60% of trainee solicitors are women, the report says. The pipeline isn’t lacking.
“Practically every search firm in Central has a pile of resumes of female candidates for director level positions,” Amar Gill, BlackRock Inc.’s head of investment stewardship for Asia-Pacific, wrote in the HKICS report. “Are the boards of Hong Kong companies, dominated as they appear to be by old-school chummy males, reaching out beyond their close circle of friends and making a real effort to bring diversity to their boards?”
The arguments for greater diversity are well rehearsed. Drawing on people with different backgrounds and perspectives should strengthen the board’s effectiveness and ability to oversee managers. People with contrasting opinions and voices are more likely to challenge each other, guarding against the risk of yes-men and groupthink.
Evidence from academic research has been mixed; one 2014 paper that combined the results of 140 studies on female board representation found small positive effects on accounting returns and near zero on market performance. This shouldn’t matter. It’s back to front to expect gender advocates to prove that more balanced boards would perform better. The arguments in favor of greater diversity are intuitively and logically correct; the onus should be on defenders of the status quo to prove that change would be detrimental.
Redressing the gender balance would represent a progressive social change for Hong Kong, albeit in the rarefied top echelons of business, at a time when pressure for a more pluralist and representative political system has been blocked. Beijing’s tightening grip on the former British colony has caused Hong Kong to lose its ranking among the world’s freest economies, and pushed some expatriate professionals to consider leaving the city. Acting on board diversity offers a chance for Hong Kong to show that, at least in some areas, it is still moving with the global trend. It should grab the opportunity with both hands, and move faster.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew Brooker is a columnist and editor with Bloomberg Opinion. He previously was a columnist, editor and bureau chief for Bloomberg News. Before joining Bloomberg, he worked for the South China Morning Post. He is a CFA charterholder.
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