[Opinion] Urgent Need to Increase Female Directors' Participation on the Board

On the 9th, the National Assembly plenary session passed a partial amendment to the Capital Market Act, which includes the provision that "for publicly listed companies with total assets of 2 trillion won or more, the board of directors must not be composed entirely of directors of a single gender." It is considered an important milestone in promoting the expansion of women's participation in corporate management, as the newly added clause, initially a recommendation during the standing committee review, was changed into a mandatory provision through the legislative review process.

The proportion of female directors on boards is a global issue, and various measures to promote women's participation on boards are being implemented. According to an OECD report last year, among 49 surveyed countries, 30 have expanded the proportion of female directors by setting quotas or voluntary targets. Among countries implementing female director quotas, five countries (Denmark, France, Iceland, Norway, Spain) set the female director ratio at 40%, while four countries (Belgium, Germany, Italy, Portugal) set it between 20% and 35%.

In the United States, although there is no federal regulation yet, California announced that publicly listed companies headquartered in California must appoint at least one female director by the end of last year and two female directors by 2021. According to Morgan Stanley Capital International (MSCI), among companies included in the All Country World Index (ACWI), 78.7% had at least one female director in 2018.

In Korea, it is true that the protection of women's rights is very weak compared to other advanced countries. According to the Glass Ceiling Index published last year by the British weekly The Economist, Korea ranked last among OECD countries for seven consecutive years and also ranked lowest in the proportion of female directors and executives among detailed categories. As of the end of 2018, among 749 companies listed on the Korea Stock Exchange, 85% had boards composed entirely of men, and among 117 companies with assets over 2 trillion won, only 17 had female board members.

The content of women's participation on boards is even more sparse. As of the end of 2018, the number of female directors among 749 listed companies on the Korea Stock Exchange was 128, including 77 inside directors and 51 outside directors. However, only 10 inside directors were independent from controlling shareholders, accounting for just 0.4% of the total 2,501 inside directors. This reflects the reality that women rarely get promoted to professional management positions.

Recently, the British financial newspaper Financial Times reported an interesting study related to female CEOs. A study of 1,600 U.S. companies over 14 years found that although there was no change in overall management performance such as profitability after women joined the board, stock prices declined for two years. To understand the reason, researchers gave 200 MBA students a hypothetical corporate disclosure announcing a new director appointment and asked whether the stock price would rise or fall. Despite identical information, most expected the stock price to rise if the new director was male, but more expected a decline if the director was female. This experiment concluded that bias against female directors led to stock price declines regardless of performance.

What is the solution? The Financial Times suggests that women's participation in management should expand to the point where it is no longer newsworthy, and to achieve this, mandatory quotas for female directors, adopted by many European countries, are an effective measure.

To address the sluggish participation of women in corporate management, first, a consensus on the need for gender diversity on boards must be formed, and societal awareness must improve. In addition, actions to resolve gender diversity issues on boards should be supported by institutional and systemic measures. In September last year, the government established the "Government-wide Balanced Personnel Promotion Plan," setting goals to fill 10% of senior public officials, 20% of heads of basic local government departments, and 20% of public institution executives with female managers by 2022. While it is practically difficult to set and enforce such targets for private companies, policy measures that can move in the same direction as the public sector are necessary.

This amendment to the Capital Market Act is significant as a first step to expand women's participation in corporate management by requiring large companies to include at least one independent female outside director. To shed the stigma of ranking last for seven consecutive years in the Glass Ceiling Index, corporate organizational culture and systems that ensure fair treatment of women must be urgently improved.

Shin Jin-young, President of the Korea Corporate Governance Service and Professor at Yonsei University Business School