Trends suggest small cap companies will speed up appointment of female directors.

    This article first appeared in 'Beyond 200: A Study of Gender Diversity in ASX 201-500 companies', a report by AICD and Heidrick & Struggles.


    Governance change usually starts in large companies and gradually moves to smaller ones. That may be true of the push for better gender diversity on boards. In time, smaller ASX-listed companies are expected to follow the lead of ASX 200 companies and appoint more women to their boards.

    However, it is simplistic to extrapolate the experience of ASX 200 companies with gender diversity to small cap companies or assume similar gains will occur.

    Far less is known about small cap boards than boards of large companies. Academic and market research on boards, in Australia and overseas, has mostly focused on large companies. Similarly, market pressure from proxy advisers and investor groups on gender diversity has mostly been directed towards larger companies.

    Governance campaigns, here and overseas, to have more women on boards have targeted large cap companies. For example, the AICD target that 30 per cent of directors are women by the end of 2018 is for ASX 200 companies.

    More investigation of the characteristics of small cap boards, their gender diversity and its effect on firm performance is worthwhile. The international governance community must understand the needs of small cap companies, boards and their stakeholders before drawing definitive conclusions about the future of gender diversity and small caps.

    Australia’s experience with gender diversity on small cap boards is broadly in line with trends in the United Kingdom and the United States, markets that do not have mandatory quotas for women on boards.

    Women occupied 12 per cent of board positions in companies in the Russell 2000 index of US-listed small caps. That compared to 20 per cent female representation on boards in S&P 500 companies in the United States.

    In the United Kingdom, women held 13 per cent of board positions in FTSE Small Cap Index companies in 2013. That compared to 19 per cent female representation on boards of FTSE 100 companies at that time.

    Although global share market indices are not directly comparable, the data implies that Australian small caps are matching gender diversity levels on boards in similar markets.

    That does not mean Australian small cap companies, like others in Western markets, are immune from market forces to improve board gender diversity. The benefits of diversity — across all forms — in improving decision making and organisational culture are well known. Like ASX 200 companies, small caps have much to gain from boardroom diversity.

    Also, small cap companies must recognise market and community expectations on gender balance. As more institutional capital is invested in small cap companies, and subject to responsible investment processes with environmental, social, and governance (ESG) filters, market pressure on those lagging on gender diversity is expected to rise.

    Several trends suggest gender diversity will become a larger governance issue for ASX 201-500 companies this decade and next and that their boards will have a measured response through appointing more women, as is happening in ASX 200 companies.

    Here are seven interconnected trends:

    1. Rise of responsible investing

    The push for better gender diversity on small cap boards ultimately starts with investors. Nine in 10 Australians expect their superannuation or other investments to be invested responsibly and ethically, according to Responsible Investment Association Australasia (RIAA).

    Growing community interest in responsible investing has led to strong growth in institutional capital invested via responsible investment filters.

    Responsible investment constituted $622 billion of assets under management as at December 2016, representing around half of all assets professionally managed in Australia, found RIAA.7 Within that, $557.1 billion was managed through ‘broad responsible investment’ strategies, which integrate ESG criteria, including gender diversity on boards, in investment decisions.

    Simply, more institutional capital, via superannuation, is considering gender diversity as one of many ESG factors as part of the investment process. In time, this weight of money is expected to increase market pressure on companies, large and small, that lag on gender diversity.

    2. Growth in small cap investing

    As Australia’s superannuation pool expands, more institutional capital will be invested in smaller listed companies. The size of Australian superannuation assets ($2.61 trillion) is larger than the investable universe on the ASX ($1.9 trillion).

    ASX listed small caps have been a consistent source of “alpha” (a return greater than the market return). Over 10 years, 67 per cent of Australian small cap funds outperformed their respective benchmark index, according to S&P Global.10 That compared to 74 per cent of Australian large cap

    equity funds underperforming the ASX 200 index over 10 years.

    The potential for higher returns from smaller listed companies saw more fund managers in 2017 launch micro cap funds investing in stocks outside of the ASX 300.

    The implication is clear: as more institutional capital that factors in ESG criteria is directed to small cap companies, market interest in gender diversity on small cap boards — and pressure for change — will slowly build.

    3. Rise of index investing

    Global asset managers with index funds have been among the most vocal proponents of gender diversity on boards. BlackRock Inc., the world’s largest money manager, expects every board to have at least two women. Vanguard, another prominent global asset manager, wants women to hold 30 per cent of board roles.

    Gender diversity expectations of these and other global asset managers do not distinguish between large and small cap companies. Moreover, BlackRock, Vanguard and State Street Global Advisors, another prominent gender diversity proponent, have ASX-quoted exchange-traded funds (ETFs) over small cap share market indices.

    The upshot is global asset managers with a stated interest in better gender diversity on boards increasing their ownership of small cap Australian companies via ETFs (index funds). ETFs are one of the world’s fastest-growing investment products, with US$4.6 trillion invested globally through these funds.

    That suggests greater engagement between global and local asset managers (in index and active funds) and Australian small cap companies on ESG-related issues, such as board gender diversity.

    4. Market pressure intensifying

    In addition to asset managers taking a more public stance on board gender diversity, Australian investor groups are applying greater pressure on ASX-listed companies lagging in this respect.

    The Australian Council of Superannuation Investors (ACSI) in 2017 said for the first time it will vote against the re-election of certain directors of companies that have zero women boards, and against boards with less than 30 per cent women on a case-by-case basis.15 ACSI in 2017 acted on its diversity guidelines position, voting against the re-election of directors of a handful of ASX-listed companies with poor diversity.16 ACSI’s focus has mostly been on ASX 200 companies.

    Investor groups and the funds they represent are expected to take stronger action against zero-women boards in coming years, including those of small cap companies, principally by voting against the re-election of some directors at annual general meetings.

    5. Gender reporting/disclosure

    Better reporting and disclosure of gender diversity in ASX listed companies, for executive teams, boards and organisations, is an important development for ASX 201-500 companies. Gender diversity metrics provide greater transparency on this issue and allow the market to make a more informed assessment on diversity leaders and laggards.

    Gender-diversity disclosure among ASX 201-500 companies slightly improved in 2015, compared to two years earlier, according to a KPMG/ASX study.17 The research found that 88 per cent of ASX 201-500 companies had an established diversity policy.

    Eighty-three per cent of ASX 201-500 companies in the study disclosed the proportion of women on their board, compared to 98 per cent in ASX 200 companies. Sixty-five per cent of ASX 201-500 companies disclosed the proportion of women in executive roles, and 79 per cent disclosed the proportion of women across the organisation.

    Women formed 38 per cent of the workforce in ASX 201-500 companies in 2015, from 34 per cent in 2012.18 Although the change is small, a higher proportion of women in ASX 201-500 companies suggests a higher proportion of female managers and executives in time, which is seen as a precursor to more women on boards. Directors of larger listed companies often have senior executive experience.

    6. Share market floats and diversity

    IPOs are an important source of board formation — and an opportunity for companies to begin life as a listed entity with stronger gender balance on their boards.

    Most of the top 30 companies for gender diversity in the ASX 201-500 listed within the past five years. In contrast, most companies with zero-women boards have been listed on ASX for more than 10 years.

    The ASX had its most active year for IPOs in 2017, by volume, in a decade, with 143 listings.19 Small cap listings proliferated. Tech IPOs have been prominent, with the ASX attracting 27 tech IPOs in 2016, including several overseas-based companies, and ranking third among global exchanges for IPOs in the tech sector.

    There has been a push in recent years for privately owned tech companies and start-ups to improve their gender diversity.21 US investment bank Morgan Stanley found that listed tech companies with higher gender diversity deliver higher returns.

    As more tech companies list on ASX via IPOs, and as more floats occur generally, foundations for better gender diversity among ASX 201-500 companies are forming.

    7. Company size, complexity add to small cap appeal

    There is a correlation between company size, board size and gender diversity. ASX 201-500 companies have an average board size of 5.5 members. ASX 200 companies have an average of 7.5 board members.

    As the combined market value of ASX 201-500 rise in the coming decade, their average board size will likely increase, creating opportunities to improve gender diversity through appointing female directors.

    If current trends continue, the median market capitalisation of companies in the S&P/ASX Small Ordinaries index (a gauge of companies ranked 101 to 300 by market value) will exceed $1 billion in the coming decade. The current median market capitalisation for the Small Ordinaries is $865 million, according to S&P Global.

    As their shareholder base expands, ASX 201-500 companies will require more experienced and diverse boards. This could lead to a gradual increase in the pool of director fees for these companies, adding to the appeal of serving on their boards.

    Also, as more information technology, financial technology (fintech) and life sciences IPOs occur on the ASX, the sector composition of ASX 201-500 companies will slowly change. Much industry disruption could come from small cap companies, making their boards attractive to directors wanting to govern “disrupters” rather than the disrupted (incumbent larger companies).

    As stated earlier, there is scant empirical evidence on director attitudes towards small cap boards in Australia or overseas to support this view. But anecdotally, the appeal of governing high-growth smaller companies that are disrupting markets and have global ambition — and spending more board time on strategy than compliance — is rising.

    Some directors of ASX 200 companies might find that having a small cap role in their governance portfolio adds to their knowledge of industry disruption, technology and overall board skills.

    Increasingly, ASX 200 directors and others looking to build their governance portfolio could view small caps as an opportunity to govern some of the market’s most exciting and diverse companies — and potentially share in wealth creation through equity incentives.

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