Banker's Digest

Banker's Digest


108.07台灣銀行家雜誌第115期 / By Olga Rakhmanina

Diversity in the boardroom has become a prerequisite for effective company governance.No longer viewed as simply ‘nice to have’, the concept is gaining momentum among policymakers and businesses alike.Two areas are under particular scrutiny in the financial services industry: balanced gender representation and availability of sufficient technology expertise fit for the new age. An effective, knowledgeable and independent board of directors is an essential element of any company’s long-term success.As a key decision-making and oversight body, the board should have a strong understanding of the firm’s business, the environment within which it operates as well as developments that may affect its future prospects.Directors should be equipped to deal with changes in the fast-moving business world. Diversity in the boardroom supports these objectives by bringing different backgrounds, skillsets and experiences to the table to facilitate robust discussion, create opportunity for constructive challenge and overcome the tendency towards groupthink.Failure to overcome groupthink played a role in the devastating 2008-09 global financial crisis as senior executives failed to question the wisdom of their colleagues’ decisions and relied on others to raise concerns. Since then, momentum has been building – from the standpoint of what's best for business – for diverse representation at the board.Diversity can take many different forms and is usually discussed under two categories: inherent (gender, ethnicity, sexual orientation etc) and acquired (education, experience, international background etc).Whichever category is considered, the key is that they all bring a diversity of perspectives and opinions to ensure informed and balanced governance of the firm.Two types of diversity have received particular attention in the banking industry: gender balance and digital knowledge, which interestingly have more in common than first meets the eye.As specialists point out, however, all categories are interconnected and true diversity seeks to accommodate all differences.UNLOCK THE EXISTING POTENTIALA number of recent studies have highlighted that companies with more women in leadership positions enjoy better financial results.According to banking giant Credit Suisse, companies with at least one woman director gain better return on their investments compared to those with all-male boards .McKinsey & Company, a global management consultancy, drew similar conclusions from the governance data of over 1,000 companies in 12 countries.According to their analysis, gender diversity on executive teams (defined as the CEO and two levels below) increases both profitability and value creation .These findings come with a significant caveat as research brings out the relationship between diversity and financial performance but does not provide definitive evidence of causation.Professor Alice Eagly at Northwestern University in the US has criticised studies on the subject as they tend to omit other variables from the analysis .Impact on profitability entails a complex web of factors which are not fully understood, let alone defined. That is not to say that gender diversity is unimportant.Having more women in the boardroom generates a wider range of business observations and consumer insights as females bring a different set of backgrounds, professional skills and life experiences.According to the Annual Corporate Directors Survey 2018, conducted by PwC, a global consultancy firm, 84% of US public firms’ directors believe that diversity enhances board performance .Diversity has become an essential component of the license to operate and promotes the company’s image as a better business partner and employer.The most important point perhaps is that society should need no justification for putting more women on the board when they represent half of the world’s population and perform as well as their male colleagues.Significant obstacles remain, however, on the way to greater female participation at the top.Senior appointments are often criticised for being made on the basis of networking, rather than through a robust investigation which casts a wide enough net to find candidates outside the usual circle of friends and associates.Directors are frequently chosen from a narrow pool of C-suite officers, which is also more likely to be dominated by men.The reality is that diversity has only recently become a prominent agenda item on the policymaking and business agendas.As Karen Frank, CEO at Barclays Private Bank, has pointed out in her comment for The Banker magazine in 2018, ‘we can’t overcome quickly [decades] of not investing in women’ .Firms have recently started experiencing a lot of scrutiny on the matter from all quarters.Institutional investors are getting more vocal on the question of diversity and are putting pressure on firms to take action.BlackRock, the world’s largest asset manager, now expects companies in certain regions to include at least two women on their boards .Legal & General Investment Management, which manages over £1trn in assets, voted against over 100 UK Chairmen in 2018 where it found progress towards gender diversity somewhat lacking; it is now taking the issue globally .Some countries in Europe, including France, Germany and Italy, have taken a proactive approach by introducing mandatory quotas for women board members at listed companies .The method has a lot of critics who object to solutions based on targets, which encourages a box-ticking approach and creative compliance solutions, such as reducing the number of board members to achieve the required percentage.Many observers, on the other hand, point out that you have to start somewhere and that clear objectives have already brought some measurable results.Granted, quotas implementation has encountered some difficulties, such as having a small number of women sitting on too many boards, but the same problem applies to men who often find their time stretched thinly between multiple directorships. In the UK, the business-led and government-supported Hampton-Alexander Review has set a voluntary target of minimum 33% women on FTSE 350 boards by the end of 2020.Its latest report – released in November 2018 – quoted significant progress: Women now occupy more than 30% of board positions at FTSE 100 companies, an improvement over 12.5% in 2011 .The update, however, highlighted the limitations that might hold back meaningful progress.A number of companies continue to demonstrate limited commitment to diversity and make tokenistic gestures with single appointments to their boards.This is important because recent research in the US demonstrates that whilst women make a difference at the board level, the real impact is felt where there are enough of them. As Sheila Ronning, founder and chief executive of Women in the Boardroom, put it in the American Banker, ‘There is power in numbers. It is pretty common for one woman at the table to be the token, where two is a presence and three is a voice’ .Another initiative, the 30% Club, was launched in the UK in 2010 and has since expanded to 13 countries (referred to as Chapters).The campaign works with chairpersons and chief executives of large listed firms as well as governments and asset managers to promote greater gender diversity.Japan became the latest country to join on 1 May 2019, which interestingly coincides with the start of the Reiwa era.Japan’s objective is to have women occupy 10% of board seats at TOPIX 100 firms by the end of 2020, which should then increase to 30% by the end of 2030 .This represents a significant shift for the corporate world where – according to Nikkei Asian Review – four of five listed companies had no women on their boards in 2018 .Quotas, campaigns and investor pressure focus leaders’ minds and push them into action.Various analyses demonstrate, however, that whilst firms invest significant time and financial resources into promoting diversity, progress remains somewhat limited.This is often explained by a mismatch between senior management’s understanding of how to promote diversity and what measures actually work in practice.According to Boston Consulting Group’s report Moving Toward Gender Diversity in Southeast Asia, exposure to role models through mentorship programmes as well as flexibility in the workplace – parental leave, part-time hours and childcare support – have the most potential to make a difference to the diversity dynamic.Management, on the other hand, continues to focus on the less impactful but high-profile activities, such as promoting public commitment and gender diversity strategy . MIND THE DIGITAL GAPBanking industry is experiencing unprecedented pressure to change in the face of continuous technological innovation, emerging cybersecurity threats and increased regulatory activity.The competitive landscape in banking has also transformed as banks no longer compete with their peers, but with agile fintech firms.The role of technology in modern financial services has become multi-faceted; it is no longer limited to back-office operations but is also revolutionizing customer-facing functionality, which requires profound transformation of traditional banking institutions.Technology has thus become a centerpiece of strategy for any bank that strives to survive and thrive in the digital age.As incumbents around the world announce ambitious investment plans into new digital capabilities and undertake expensive transformation projects – IT spending of the global banking industry for 2018 was estimated at US$ 519 billion by the research firm Gartner– boards of directors need to possess relevant expertise to deal with new challenges.As Chris Skinner, the regular columnist for The Banker magazine, pointed out, ‘if the team at boardroom level have little digital transformation experience, how could they vet the management team of the bank and, specifically, ensure their digital leaders are the right people?’ .Composition of a lot of banking boards, however, does not reflect this trend.The Bridging the Technology Gap in Financial Services Boardrooms report released in 2016 by Accenture, a consultancy, has highlighted the limited presence of digital expertise at the boardroom table.Accenture's researchers, who analyzed over 100 largest banks around the world, found that only 6% of board members have professional technology backgrounds with 43% of banks having no relevant expertise.The UK and the US banks lead in relation to presence of technology knowledge at the board level, although the numbers are still low at 14% and 16% respectively.Chinese banks score particularly low at 1%, which is surprising given the fierce competition from big technology firms making strides into financial services .As banks look to enhance technology expertise on their boards, firms across a wide range of industries find that the exercise helps them tackle gender diversity issues too.The Digitization on Boards report by Amrop, an international executive search firm, pointed out a significant correlation between boards with technology profiles and a higher degree of female representation.On average, women hold around 35% of all board positions with a digital/technology profile across various industries with participation reaching 50% in France, Norway, Netherlands and Sweden .Niche expertise has become a differentiator for women and the trend is likely to continue provided future generations are encouraged to pursue this career path.Analysis by Accenture comes to similar conclusions: Women board directors with technology backgrounds twice exceed the number of male board directors with similar profiles.Technology sector understandably leads with over 50% of female appointments having technology expertise; banking, on the other hand, has a lot of catch-up to do at 8%, as boards have particularly limited technology knowledge compounded by low presence of women in the boardroom .As other industries engage more women directors with the expertise to bring them into the digital world, there is an opportunity for banks too to enhance their gender diversity and acquire missing skills.This requires forward planning and investment to encourage more women to join the profession, but it looks like a win-win situation.


Banker's Digest


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