The Institute of Corporate Directors Malaysia (ICDM or the organisation) today announced the launch of the inaugural Malaysia Board Diversity Study and Index (the Study and Index). The Study and Index were developed by ICDM in partnership with Willis Towers Watson (WTW), with the intention to establish correlations between board diversity and company performance, as well as to institutionalise the diversity agenda within Malaysia’s corporate landscape through a benchmarked, accessible, and transparent barometer.
The Study and Index examined the performance of 312 top public listed companies on Malaysia’s stock exchange, Bursa Malaysia, from 2017-2019. It covers family and non-family businesses across the small, mid to large market capitalisation segments. The Index measures boards against eight (8) key dimensions of board diversity: gender, age, tenure, independence, culture, international expertise, domain expertise, and industry expertise, after which, the aggregate performance of companies is evaluated and ranked against the diverse dimensions.
Michele Kythe Lim, President and Chief Executive Officer of ICDM said: “The release of the Study and Index is a significant milestone for Malaysia, specifically for our country’s corporate governance (CG) landscape. As Malaysia moves towards strengthening of CG through adoption of codes of conduct and guidelines, establishing a holistic and systematised standard for board diversity is integral in ensuring we continue to be aligned to the set goals of Corporate Malaysia. The Index will serve as a benchmark for Malaysian companies in improving their diversity on boards, which is a key strategic driver in improving the overall performance of an organisation. It will also help contribute towards a more sustainable, resilient, responsible, Corporate Malaysia over the long-term.”
One of the key observations from the Study is that a well-constituted board is better placed to achieve sustainable financial performance across key financial performance metrics, suggesting a correlation between board diversity attributes and company financial performance. Specifically, the Study has showcased that greater adoption of diversity attributes across different dimensions have correlation with performance:
- Gender – Companies with at least one-third representation of women displayed stronger return on equity (ROE);
- Independence – Boards with 30%-50% independent directors showed higher ROE and stronger revenue growth, compared to boards with fewer independent directors
- Tenure – Companies with long tenure spreads (of more than 9 years) showed much lower price-to-earnings (P/E) multiples and revenue growth;
- Culture – Boards with representations of more than 3 cultural backgrounds showed stronger P/E multiples;
- International expertise – Companies whose Directors had a mix of domestic, regional, and global experiences had had higher ROE, revenue growth and P/E multiples.
Shai Ganu, Managing Director, Global Practice Leader – Executive Compensation and Governance, WTW commented, “Having the right fit in terms of board composition is crucial as the board needs to have the breadth and depth of capabilities, experience and perspectives to fulfil its oversight responsibilities. An effective board should start from defining its role and ensure that collectively the board has the right capabilities. For this, an important pre-condition tends to be Board diversity. As the complexity of the business environment continues to escalate, companies are likely to face new challenges and the need to pivot their businesses. The quality of the board will lead to a more considered decision making, which in turn will help the board discharge its stewardship responsibilities, help enhance overall performance, and future-proof the company.”
“The launch of the Study and Index is also significant for ICDM as we continue to drive and encourage the adoption of the philosophies and principles to encourage enhanced diversity on boards. This is in tandem with our commitment to deliver bespoke and high-quality offerings catered to the needs of the director community, such as director sourcing and board evaluation. The conversation on board diversity is nascent, as is evident with the greater investor push for improvement in board diversity from institutional investors. As our corporate landscape continues to evolve and grow, we hope that this Study and Index will reinforce the importance and essentiality of diversity on boards, as well as serve as a springboard for a more robust and high-performing Corporate Malaysia,” Michele Kythe Lim also said.
To spur greater board diversity, there are four (4) key actionable steps that Malaysian boards can undertake:
- Relook at the board architecture – Board refreshment may be necessary, especially with overly long tenure directors and consideration for additional independent non-executive directors. A board skills matrix analysis may also help determine the skill gaps needed to be filled.
- Look beyond inner circles and personal networks for new board candidates – Start utilising independent sources to identify suitably qualified candidates, to get a more diverse pool of candidates to choose from.
- Evaluate board effectiveness – The Nomination & Remuneration Committee should regularly assess whether the current board mix is aligned to the organisation’s future growth strategy.
- Constantly acquire new skills and knowledge – Refresh capabilities, keep up with the latest trends, issues and developments that may impact the organisation and the industry.
The Study is based on a total of 312 companies which are listed on Bursa Malaysia. The companies sampled within this Study constituted family businesses and non-family businesses, and are categorised based on market capitalisation as at 31 December 2019, i.e. small-cap (less than RM1 billion), mid-cap (RM1 billion or more but less than RM2 billion) and large-cap (RM2 billion or more). All data are sourced from publicly available data, with all non-executive director’s (NED) information based on disclosures as at 31 December 2019 and 31 December 2016.
Download Study and Index here.