FRA Mandates Women’s Representation

Two new decisions by the board of the Financial Regulatory Authority (“FRA”) were recently published in the Egyptian Gazette, mandating women’s representation on the boards of directors of FRA-supervised companies as a prerequisite for listing on the Egyptian Stock Exchange and for granting initial approval on the incorporation of non-banking financial companies (“NBFCs”) or licensing the undertaking of their activities. Already listed companies and already operating NBFCs must comply with this new regulation by 31 December 2020 (whenever possible) or in their first board elections. Both decisions went into effect on 30 September 2019.

Background

There is a growing international momentum towards increasing gender diversity in the workplace, particularly in the upper echelons of the corporate world. For instance, in Norway, Spain, France, and Iceland, laws were passed requiring that women comprise at least 40% of the boards of publicly listed companies. Additionally, last year, California became the first American state to require all locally headquartered publicly traded companies to have at least one female director by 2020. One of the main reasons behind such moves is the view that a gender-diverse board could possibly allow for a broader spectrum of perspectives, ideas, and management styles in the boardroom table. Several studies have corroborated this stance, tracing a positive correlation between greater gender diversity on corporate boards and a set of business benefits, including the improvement of corporate performance, creativity and innovation, diversification of skills, attraction and retainment of talent, profit increases, effective decision-making, and corporate reputation. The International Labour Organization (“ILO”) and the International Finance Corporation (“IFC”) have been among the prominent proponents of such views. For instance, in a 2019 report by ILO on women in business and management, almost three-quarters of the surveyed 13,000 enterprises in 70 countries reported profit increases ranging 5-20% associated with gender diversity in their management, with the majority of those witnessing increases between 10-15%. Additionally, a 2015 meta-analysis of 140 research studies of the relationship between female board representation and corporate performance concluded a positive correlation with accounting returns.[1] With regards to Egypt in particular, IFC published a study in 2019 which reported that 47% of the 2,139 Egyptian companies sampled (which included both privately-held companies and publicly-listed ones) have female board members; of these, 39% have one or two female board members while only 8% have three or more. Thus, overall, women represent only 14% of all board members in the sample. The study additionally found a positive relationship between gender-diverse boards and a company’s financial performance in Egypt, calculating that privately-held companies with female board members exhibited 2% higher growth in return on equity, 4% higher growth in return on assets, and 5% higher growth in return on sales while publicly-listed companies with female board members exhibited 7% higher return on equity. Of these, privately-held companies with five female board members had the highest return on equity and return on assets while publicly listed companies with three female board members had the highest return on equity. Qualitatively, the study’s findings linked “sound economic and strategic thinking,” “excellence in problem-solving skills,” and “exceptional ability to identify profitable deals” to female board members, which significantly benefitted companies in terms of risk management and planning. Finally, the study also connected gender-diverse boards to a better marketplace and to better attunement to customer and investor needs, particularly since women drive purchasing decisions in 85% of households in Egypt as reported in the study.[2]

The Two FRA Decisions

Against this backdrop, the FRA issued its two decisions on women’s representation on the boards of its supervised companies, citing the aforementioned 2019 IFC study and highlighting that these decisions mainly aim to enhance Egypt’s ranking on the Doing Business report, achieve sustainable development, and improve women’s empowerment.[3]

1. Listed Companies: FRA Board Decision No. 123 of 2019

FRA Board of Directors Decision No. 123 of 2019[4] amends the rules for the listing and delisting of securities on the Egyptian Stock Exchange, originally issued through the FRA Board of Directors Decision No. 11 of 2014, by adding a new requirement to the list of general prerequisites for listing: that the company’s board of directors comprises at least a female member. Companies with already listed securities must comply to this new requirement by 31 December 2020 (whenever possible) or in the first board elections to be held.

2. Non-Banking Financial Companies: FRA Board Decision No. 124 of 2019

As for the second FRA Board of Directors Decision No. 124 of 2019,[5] this amends FRA Board of Directors Decision No. 53 of 2018 that reorganized the regulatory regime for licensing and shareholding in NBFCs, by adding a new requirement to the prerequisites for obtaining initial approval to incorporate NBFCs as well as licenses to undertake non-banking financial activities: that the company’s board of directors includes at least a female member. However, professional companies, which are to be identified in an FRA Chairman’s decision, are exempt from this provision. The deadline for complying with this new requirement is set either by 31 December 2020 (whenever possible) or during the first board elections to be held.

Conclusion

Despite being an important corporate governance principle, there is no consensus as to whether gender inclusivity and diversity, particularly at the senior level, actually improves corporate performance; in other words, evidence regarding the purported causal relationship has been mixed. Against the above reported studies that trace such a connection, such as those of ILO and IFC, there has been research questioning these results or the adopted methodologies. In particular, several peer-reviewed academic studies suggest that board gender diversity either has a very weak relationship with company performance or no relationship at all, such that companies do not perform better or worse when they have women on their boards; this entails that, according to these studies, “there is no business case for – or against – appointing women to corporate boards”.[6] However, in attempts to interpret such diverging representations of the effects of gender-diverse corporate boards, an article published in the Harvard Business Review proposed that diversity alone is not the determining factor guaranteeing better performance for the board and the firm; instead, it is the culture of the diverse board that can affect the performance of the board with regards to its duties and the oversight of the company. This cultural element includes such things as whether the board is egalitarian (rather than hierarchical) in its dynamic and is thus more conducive to open communication and to the encouragement and integration of numerous and divergent voices. In addition, a more expanded view of diversity is required to allow for the multiple and interconnected factors of gender, ethnicity, age, and professional skills, backgrounds, expertise, and roles. In other words, gender diversity on corporate boards should not simply be a form of tokenism – with the addition of more women to boards simply for the sake of appearances and fulfilling certain regulatory requirements – but should be a processual and multifaceted implementation that is reflected in practices rather than mere numbers.[7] Thus, despite being a good step towards formalizing gender diversity in the workplace in Egypt, the FRA board decisions will require additional and complementary policies and processes to go beyond mere board gender composition quotas, which are short-term solutions. The key factors preventing women from reaching decision-making positions in Egypt – such as inflexible working hours that disadvantage women in terms of their work–life balance, the lack of adequate paternity leave, the tendency to generally confine the hiring of women to administrative jobs (that do not come with key revenue-generating or operational responsibilities), and societal inertia and resistance to women’s empowerment – must be adequately and simultaneously addressed.[8]   [1] Bawden-Davis, J. (2018). Why Companies Are Adding More Women Board Members to Their Rosters. American Express. Available through this link. Creary, S.J., McDonnell, M-H., Ghai, S., and Scruggs, J. (2019). When and Why Diversity Improves Your Board’s Performance. Harvard Business Review. Available through this link. IFC. (2019). Women on Boards and in Business Leadership. Available through this link. ILO. (2019). Women in Leadership Bring Better Business Performance. Available through this link. [2] IFC. (2019b). Women on Board in Egypt: How Gender-Diverse Boards Bring Value to Egyptian Companies. Available through this link. [3] FRA. (2019, September 17). FRA requires women’s representation on boards of listed companies and companies operating in non-banking financial activities. Available through this link. [4] FRA Board of Directors Decision No. 123/2019 amending FRA Decision No. 11/2014 with the rules for listing and delisting of securities on the Egyptian Stock Exchange, Egyptian Gazette, Issue No. 217, 29 September 2019. [5] FRA Board of Directors Decision No. 124/2019 amending FRA Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 217, 29 September 2019. [6] Klein, K. (2017). Does Gender Diversity on Boards Really Boost Company Performance? University of Pennsylvania. Available through this link. [7] Creary et al. (2019). [8] Durbin, A. (2011). Optimizing Board Effectiveness with Gender Diversity: Are Quotas the Answer? International Finance Corporation. Available through this link. IFC. (2019a); ILO. (2019).