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A Study on Board Diversity at Philippine Publicly-Listed Companies
A Study on Board Diversity at Philippine Publicly-Listed Companies
Objectives, Methodology and Scope. This report aims to provide relevant data on board diversity of Philippine publicly-listed companies (PLCs) for the years 2019, 2020 and 2021.
Diversity, as defined by the ICD in the Philippines, is the inclusion of more than one gender, age group, business expertise and experience, and other relevant attributes in the composition of a corporation’s board. In advocating for board diversity, ICD contends that diversity in the boardroom promotes the inclusion of different perspectives and ideas, mitigates against “group think,” improves oversight, and promotes informed decision-making and governance. Good corporate governance has been shown to correlate directly with corporate profitability and growth. Government and regulators require it. Companies of all sizes need it.
This 2022 study is a result of an independent review of all active PLCs registered with the Philippine Securities Exchange Commission (SEC) numbering 271, 270, and 271 companies as of December 31, 2019, 2020, and 2021, respectively. In 2021, there were actually 16 newly listed companies but at same time 15 existing PLCs were suspended.
Appropriate statistical tools and analyses were used to determine (if any) relationships between various local PLC’s board attributes and their respective company Return on Equity (ROE).
The PLCs’ company data as well as their respective board composition from the years 2019 to 2021 were used to determine significant relationships between the ROE of a company (considered the dependent variable in the study) versus some “independent variables”, from the perspective of the company and the individual directors of the company. Published corporate information were collected from the Philippine Stock Exchange (PSE) Edge portal, such as company data and
director data including expertise.
Statistical testing was conducted on six combinations, macro-level (company), and micro-level (board director) and over a span of three years (2019, 2020, and 2021).
The entire analysis of this study involved relating the factors / independent variables with ROE, which resulted in many non-rejections of the null hypothesis that the variables do not have a significant relationship.
FINDINGS ON PLC’s PERFORMANCE
Average Return on Equity (ROE) by Sector
On average, the "ETF-Equity", "Financials”, and “Small/Medium & Emerging Boards” sectors exhibited better and positive ROE compared to the other sectors in 2019 and 2020. However, in 2021, only the “Small/Medium & Emerging Boards” sector remained on top of the list. Belonging to these sectors was also found to have statistical significance with ROE.
In 2020, the "Industrial" sector was badly hit by the pandemic posting a negative average ROE of 58% compared to a positive ROE of almost 2% in 2019. However, they were able to bounce back in 2021 with a positive ROE of 11%. Meanwhile, the "Property" sector bounced back from an ROE of negative 19.7% in 2019 to a positive ROE of 6.5% in 2020, and 9.31% in 2021. "Holding Firms" reduced their losses posting ROE of negative 76.6% in 2019, to negative 13.8% in 2020, and to negative 2.23% in 2021.
Of the total 271 PLCs in 2021, 45 or 17% are "Holding Firms", of which 15 of the 45 have subsidiaries or associated companies that are also listed.
Analysis by Director: Gender Diversity
Overall, the actual average ratio of female and male directors for all PLCs is 17:83 in 2019, 18:82 in 2020, and 19:81 in 2021. Approximately additional 8, 20 and 30 female directors in PLCs were elected in 2019, 2020 and 2021, respectively.
The results of the statistical tests indicated that in 2020 and 2021, the presence of women directors in boards had a significant relationship with ROE, which was not evident in 2019.
Analysis by Director: Age and Tenure Diversity
For this factor, age refers to the chronological age of the director while tenure refers to the length of time the individual occupied the position of director reckoned from the date of his/her first appointment to the board of a company.
The results of the statistical tests indicate that the higher the mean board director age within a company, the higher the company's ROE.
Based on the results for all three years, it was noted that: a) age and ROE are significantly and directly related; and b) director's tenure in the board is not a significant predictor of ROE.
Analysis by Director: Diversity in Board Director's Expertise
For this analysis, the expertise considered includes business management, finance, legal, banking domain, technology, and other specialized fields.
For 2019, companies whose board directors had more expertise in business management showed significant influence in the company's ROE.
In 2020, with the effects of the global pandemic, companies whose board members have expertise in finance and those who do not necessarily have expertise in business management exhibited better ROE performance. The same holds for 2021, though with Business Management only.
INSIGHTS FROM THE STUDY
Given the limitations of the study as presented under the "Methodology" section of this report, the committee drew some key findings that reflect the landscape of board diversity in the country during the three-year period covered.
During the 2020 pandemic and the imposition of various lockdown measures, director’s gender showed significant relationship with ROE. In particular, companies with female directors outperformed companies purely held by male directors in terms of ROE. It must be noted though, that this does not apply to before (2019) and after (2021) the pandemic lockdown.
When it comes to expertise, the companies that performed significantly better than their respective counterparts are those that have non-executive directors, and directors who are experts in Business Management (2019 and 2021), and Finance (2020).
Board directors’ seniority in age and presumably in business knowledge and experience positively influenced ROE. The higher the mean board director age within a company, the higher the company's ROE. Tenure or length of service in the company is not a predictor of ROE.
Related companies, i.e., businesses operating within a group of companies, have an advantage. The actual female directors' ratio vs. male directors is higher for related companies compared to that of non-related companies both in 2019 and 2020. Likewise, the overall directors' age profile of related companies for the same period is higher compared to non-related companies. This invites the attention of ICD to the non-related companies, which account for 70% of the Philippine PLCs as targets for its corporate governance advocacies.
CONCLUSION
Based on the results of this study, board diversity impacts business performance. Three items warrant attention:
1. The emerging significant role of women in the board, especially in improving the ROE of the business entity.
2. Expanding the composition of directors with expertise in business management and finance to boost the business’ bottom line.
3. Harnessing the knowledge and experience of directors senior in age regardless of tenure with the company, at the same time providing a plan for succession from the younger directors.
See attached PDF file to see the report.