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Monday, July 1, 2024

SECP: Gender diversity induces better financial performance in Pakistan

The SECP in a report named 'Women on Board' has revealed that greater gender diversity in comapnies leads to better financial performances

The Security and Exchange Commission of Pakistan (SECP) has discovered a direct positive correlation between gender diversity in the boards of listed companies and financial performance.

The report titled “Women on Board” ran empirical calculations on data from within Pakistan and found that the financial prosperity of listed companies increases with gender diversity on their boards.

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Pakistan has also shown an improvement since SECP set regulations on board gender diversity.

Rafae Saigol writing for Oxford Law’s website explains the dire situation of gender equality in the business world in Pakistan, he writes that The World Economic Forum ranked Pakistan third-last in terms of economic participation and opportunity for women.

Despite making up 49% of Pakistan’s overall population, the participation rate for female workers is significantly low (24%).

Top echelons in Pakistani corporations continue to be male-dominated.

In 2017, a report surveyed 550 listed corporations on the Pakistan Stock Exchange (PSX) and found that for every nine male directors, there was only one female director.

Since then, however, the situation has improved. The new report shows that this improvement has been seen primarily across three variables, i.e., the number of women on board, the number of independent women directors, and as chairpersons.

Women directors have increased by 3 percent since the SECP regulations were introduced in 2017. The ratio rose from 8.8 percent in 2017 to almost 12 percent in 2019.

In 2015 and 2017, the number of independent women directors was almost constant, at 17 and 16, respectively. It has since then risen to 51 in 2019.

Listed companies with at least one woman director have also increased from 84 in 2017 to 163 in 2019.

Tech-sectors amongst those showing improvement in gender diversity

A diverse range of sectors including finance, textile, manufacturing, pharmaceutical, chemical, engineering, automobile, and engineering have shown an increase in the number of female directors.

The textile and manufacturing sectors have the highest number of woman directors, 75 and 74, respectively.

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Other sectors either remained constant or changed slightly but overall the Pakistan business world has since 2017 shown improvement in gender diversity as per the SECP.

In the study by the SECP companies were segregated into those with and without women on their boards and then the average return on assets (ROA) and return on equity (ROE) of both groups were calculated and compared.

The results show that the financial performance of companies with women is higher in both 2017 and 2019.

The SECP also looked at these returns on a sector basis. The trend that was discovered shows that the sectors showing the highest increase in the number of women on boards show a corresponding growth in ROA and ROE.

The only sector not displaying the same trend is manufacturing, this is likely a result of external factors, including the general slowdown in the economy during this period.

SECP diversity guidelines

The SECP recommended that once effective measures are in place, regulation should look towards increasing the mandatory quota of women on boards, for as noted above, greater gender parity in the boardrooms is needed to leverage the benefits of gender diversity

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SECP added that adequate networking opportunities need to be given to senior women by nominating them on various industry forums. The current representation on the majority of such industry forums is male-dominated, denying women an equal opportunity to network and be recognized outside the limited company domain.

Why does diversity help companies?

Some researchers argue that gender diversity leads to more innovative thinking and signals to investors that a company is competently run.

Cristian L. Dezső in her research paper titled, “Does Female Representation in Top Management Improve Firm Performance? A Panel Data Investigation,” argues that female representation in top management brings informational and social diversity benefits to the top management team, enriches the behaviors exhibited by managers throughout the firm, and motivates women in middle management.

Testing their theory using 15 years of panel data on the top management teams of the S&P 1,500 firms, they find that female representation in top management improves firm performance but only to the extent that a firm’s strategy is focused on innovation, in which context the informational and social benefits of gender diversity and the behaviors associated with women in management are likely to be especially important for managerial task performance.

However, giving women opportunities acts as a catalyst for other women to join the workforce and aspire for successful positions in the job market as per the research.

GVS News Desk