Improving board diversity in the Philippines
By: Atty. Euney Marie Mata-Perez on August 17,2023
IMPROVING board diversity is increasingly seen as contributing to good corporate governance, and its promotion has attracted good governance advocates as well as regulators. There had been studies that suggested that corporate boards structured along demographic diversity, such as gender, age, ethnicity, etc., contribute to the board’s collective efficiency as well as protect the interests of shareholders and other stakeholders. While gender and independence have been the more popular indices of diversity, other factors, such as ethnicity, tenure, culture, international experience, and even age, are now being looked at as important contributors.
Mindful of this view, the Institute of Corporate Directors (ICD), through its Board Diversity Committee, did a study in the Philippine context on Board diversity at publicly listed companies (PLCs). The study covered PLCs registered with the Securities and Exchange Commission (SEC) as of 2019, 2020 and 2021, respectively, based on data collected from the PSE Edge Portal.
On the profile of PLCs, the study showed the following: 17 percent of the PLCs are holding firms, of which 15 of the 45 have subsidiaries or associated companies that are also listed. A total of 81, or approximately 30 percent, of the total active PLCs are related companies that belong to a group or conglomerate.
1. Number of women on board (WOB). The study showed that the highest percentage of WOB for the year 2021 is 31.17 percent (retail sector), followed by other financial institutions (28.57 percent) and education (27.50 percent), while there are boards that do not have any WOB. Average WOB in 2021 for various industries is as follows: banks (20.74 percent), electricity, energy and power (18.24 percent), media (9.62 percent), mining (15.76 percent), telecommunications (15.15 percent), and transportation (13.40 percent).
Average return on equity (ROE) of companies with WOB: The study showed that there is a significant positive performance increase in PLCs with WOB, as compared to those without.
2. Age. The average age of directors for all PLCs is 63. For related companies, the average age of directors is higher at 66, 67 and 66 in 2019, 2020 and 2021, respectively. The study showed that, as the average goes up, ROE tends to go up too.
3. Expertise. PLCs whose board of directors had more expertise in business management showed significant influence on the company’s ROE.
The key findings and insights are as follows:
– Board diversity fosters varied perspectives for informed decision-making, especially during challenges.
– During the 2020 pandemic, a board’s gender diversity was linked to better ROE; women-led companies outperformed male-led ones.
– Examining the gender composition of boards within related and non-related companies reveals a near parity in the ratio of female to male directors during both 2019 and 2020; however, this balance shifted in 2021.
– Although age remains a significant predictor of ROE, the length of service or tenure within the company does not carry the same predictive weight.
– The ages of directors in related companies are older on average compared to their non-related counterparts.
– In the pursuit of improving ROE, the infusion of relatively novel and vibrant beliefs and principles held by these newer directors stands as an equally crucial factor alongside the enduring wisdom offered by more seasoned members.
– Expertise linked to outperformance: non-executive directors and specialized directors in business management (2019 and 2021), banking (2019), and finance (2020).
– The dynamic evolution of business trends necessitates recognizing the potential expertise that newer board directors can bring to the table, which can rival that of their longer-serving counterparts.
– Inherent competitive advantage of related companies operating collectively under a corporate umbrella that can effectively tap into a captive market, access resources and knowledge on a shared basis, and realize advantageous economies of scale, among other benefits.
The above study was discussed at the forum entitled “Building Better Boards Through Diversity,” hosted and organized by ICD, through its Board Diversity Committee, on Aug. 15, 2023. Speakers in the forum included Mr. Shai Ganu from the Singapore Institute of Directors and Climate Governance Initiative; Atty. Rachel Esther Gumtang-Remalante, Corporate Governance and Finance director of our SEC; and Ms. Michelle Kythe-Lim of the Institute of Corporate Directors of Malaysia.
We learned that Singapore and Malaysia are much ahead in promoting board diversity and studying its impact on company performance.
Our SEC has not formally adopted any rule or regulation requiring or mandating board diversity, but it has, by policy, recognized its value. In Section 1.4 of SEC Memorandum Circular 19, Series of 2016, (on code of corporate governance for PLCs), the SEC has recommended that PLC boards have a policy on board diversity. The SEC explained that having a board diversity policy is a move to avoid groupthink and ensure that optimal decision-making is achieved.
The SEC further explained that a board diversity policy is not limited to gender diversity. It also includes diversity in age, ethnicity, culture, skills, competence and knowledge. On gender diversity policy, a good example is to increase the number of female directors, including female independent directors.
What is clear, though, is that our regulators will need more empirical data before they mandate board diversity. While it was discussed during the ICD forum that the value of a diversified board has increasingly been acknowledged, it has also been recognized that the board’s or the stakeholder’s business judgment in choosing the mix of its board members should also be respected and not thwarted.
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Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by the Asia Business Law Journal.