Pakistan has made a breakthrough on gender diversity on its corporate boards.
The Companies Act 2017, passed by the country’s parliament on May 24, requires public interest companies to have such representation of women directors as specified by the Securities and Exchange Commission of Pakistan (SECP).
For listed companies, the regulator had previously specified, through the revised Code of Corporate Governance, that within three years, the board of such companies shall have at least one woman director.
There was a need for this intervention. As many as 69 out of 100 companies included in the widely followed KSE-100 Index of Pakistan Stock Exchange (PSX) have no woman director. These include 16 out of the 20 largest listed companies in terms of free-float market capitalization.
Overall, the proportion of women directors on the boards of listed companies is only 6.4 per cent. It is far below the 17.2pc representation of women in the country’s parliament and their 15.8pc labour force participation rate. It is also much lower than the proportion of women directors in companies in the S&P 500 and FTSE 100, which now ranges from 20pc to 25pc.
The proportion of women directors will now more than double in three years, jumping from 6.4pc to at least 14.3pc.
The clear cut manner in which this change has been brought about makes compliance straightforward. Non-compliance will be subject to the same supervision, enforcement, and remedial mechanism that applies to a violation of listing regulations.
The business case for women directors in Pakistan is no different from that being made elsewhere in the world. It is associated with, though not established as a cause of, better decision making and lower corruption without any compromise on, if not improvement in, the financial performance.
There are also legal precedents from both developed (eg Norway, Finland, Germany) and developing countries (eg Malaysia, India, Kenya) of direct legal intervention to address gender diversity.
There are, however, wide variations across countries. In some countries, for example Japan, the proportion of women directors is even lower than in Pakistan. There are also many jurisdictions where policy makers so far have done little to address gender diversity.
The lack of established causality, mixed bag of legal precedents, and the inevitable debate on how effective the incoming women directors would be in improving the quality of board discussions did not deter the SECP from taking this decisive step forward.
In an exercise that took several years, the SECP was thoroughly updating the companies’ law, which was last promulgated in 1984. For gender diversity, the new law was a rare opportunity to make a breakthrough, which was not missed.
Three aspects of this important legal change are worth noting.
First, the new Companies Act containing the provision on gender diversity was passed by parliament with wide support.
Second, the change has been enabled not through subsidiary legislation but by the apex law governing companies from formation to liquidation.
Third, the requirement is for all public interest companies. This includes all companies listed on the PSX and others which have paid-up capital, turnover, number of employees, or number of shareholders above specified thresholds.
A key enabler in implementing the legal change is the Directors Training Programme offered by the Pakistan Institute of Corporate Governance.
More than 130 women have been trained under this program and more are likely to enroll.
There are also wider winds of change in favor of gender diversity in Pakistan. The country finally re-entered the MSCI Emerging Market index in 2017 after having lost its place in 2008.
Gender diversity on the boards of some of the country’s large-cap companies is expected to receive support from higher foreign investment likely to consider environmental, social, and governance (ESG) issues in investment decisions.
Pakistan’s perception on gender issues is perhaps far worse than its reality. In the 2016 Global Gender Gap Report covering 144 countries, Pakistan holds the second last position, ranked just above the war torn Syria.
Many Pakistanis and those who have visited the country would argue that there is more noise than signal in such rankings.
Leaving that debate aside, the precedent set by Pakistan for women directors shall not be insignificant.
It is the sixth most populous country in the world and a prominent name among the members of Organization of Islamic Cooperation, which, as group, has the lowest gender equality index scores.
With this major step forward, Pakistan has demonstrated that where the invisible hand of incentives is not delivering gender diversity, the visible hand of regulation needs to take corrective action.
Usman Hayat is an executive director at the Securities and Exchange Commission of Pakistan. He tweets @usman_hayat