Does gender diversity add value to HK boards?
17 January 2014
The Webb-site Total Returns series has just been updated for December 2013, completing the year, so you can now see a ranking of returns on all HK-listed stocks for the year, including reinvestment of all distributions. This also completes a 20-year series from 1994, which will continue. So we are kicking off the new year with a bit of analysis.
There is a common sense argument for diversity of minds in corporate boards. In a nutshell, if you have 9 identical directors who all have the same qualifications, experiences and cognitive biases that shape their decisions, then you might as well just have 1 director, because there will be no debate about the way forward. Better decisions are more likely to emerge if a board has a collective breadth of knowledge and expertise greater than any single member possesses, and if there is an open debate within the boardroom that allows that knowledge and expertise to carry its fair weight.
But does it matter what gender are the bodies that carry those minds into the boardroom? Does a HK board full of men make worse decisions than one that includes women? Happily, since 1995 HK-listed companies have been required to include biographies in annual reports, and more recently, in announcements of appointments, so in Webb-site Who's Who we have a complete database on the genders of HK directors, and we can link this to the total returns. In the long run, what matters to most investors is the return on their investments, and this is the best measure of corporate performance.
Coupling our complete directorship database with the Webb-site Total Returns, we present the average (mean) total returns, annually, for the past 10 years, of the ordinary shares of all companies with a HK primary listing whose shares were listed at the beginning of the year and tradable on at least 1 day in the year, grouped by the number of female directors. We exclude companies whose shares were suspended throughout the year, because the change in their value is unknown. Some of those were undergoing temporary or permanent liquidation without functioning boards anyway. Note: for a distribution of female directors per listed company (including suspended stocks) on any date since 1-Jan-1990, click here.
First, here are the numbers of companies with women on boards at the beginning of each year (no traded company had more than 6 female directors):
And here are the proportions of all traded companies that those numbers represent:
In the tables, we draw a line above 3 women, because there are so few companies with 4 or more women that any results are bound to be statistically useless. What is notable is that the proportion of companies with no women has reduced from 46.0% in 2004 to 40.3% in 2013. OK, now let's see the total shareholder returns:
The data show that in the last 3 years 2011, 2012 and 2013, companies with no female directors on average slightly out-performed those which had women on their boards, while during 2009 and 2010, those which had women on board out-performed, and the more women they had, the better they did, particularly in 2010. 2008 was mixed, but during the boom years of 2006 and 2007, companies with no women on board did substantially better than the market average. Results in 2004 and 2005 show no obvious pattern. Taking the 10 years, we see that companies with no female directors out-performed the market average in 5 years (2006, 2007, 2011, 2012, 2013) and under-performed in the other 5 years (2004, 2005, 2008, 2009, 2010).
We must emphasise that the data do not demonstrate any causality, and there are many factors which could account for differences in total returns. It may be that companies with particular business or financial characteristics, which tend to do better or worse in particular economic circumstances, are more or less likely to appoint women to their boards. The 10-year period includes the global financial crisis and the recovery thereafter.
The most we can say is that these data do not provide any compelling evidence that board gender diversity adds value to investors. The null hypothesis is that gender in itself makes no difference. That hypothesis is not contradicted by the data. It does seem more socially equitable to have gender diversity, but then so does having diversity in nationality, race, religion or sexual orientation. However, capital allocation is driven by investment returns, not by social equity.
So boards and nominations committees, and the controlling shareholders who often make the real decisions on board composition, should put gender out of their minds and instead focus on obtaining a diverse mix of expertise and experience relevant to the business and governance of the company and regardless of gender. Over time, that will inevitably lead to more women on HK boards anyway, because the educational and employment opportunities for women have improved over the last 30 years leading to a larger pipeline of women with the appropriate experience and expertise behind them.
© Webb-site.com, 2014