Diversity matters: improving inclusion in corporate boards

board members

Corporate boards – past and present – have often been criticised for being too white, too male and too old. Earlier this year, Anglo-Australian mining company, Rio Tinto, decided to address the lack of diversity on its boards by appointing three female non-executive directors after the company was ridiculed for having three times as many board members named ‘Simon’ as there were females.

At the beginning of 2020, Goldman Sachs also came under the spotlight when CEO David Solomon made the bold announcement that the investment bank would only help companies launch their IPO if they had at least one ‘diverse’ board member. Solomon told CNBC, ‘Starting on July 1st in the U.S. and Europe, we’re not going to take a company public unless there’s at least one diverse board candidate, with a focus on women’.

The scrutiny companies receive can encourage them to take real action and assess how they can improve their board homogeneity. Diversity is of increasing importance to both companies and investors alike. In an era where issues surrounding inclusion and representation are taking centre stage, businesses are becoming ever more aware that they must demonstrate their commitment to these matters.

Progress but room for improvement

One third of all board positions in the UK’s FTSE 100 companies are now held by women, a key target of the government-backed Hampton-Alexander review. Reaching this milestone is a great achievement, indicating that these large companies are taking the issue of gender inequality seriously and are taking real steps to tackle this problem.

Whilst there is progress, there is also room for much improvement. Though the top 100 firms have passed the 33% benchmark, the FTSE 250 companies are falling behind. In fact, the Hampton-Alexander review singled out 24 FTSE 250 companies that only have one woman on their board and 35 FTSE 350 firms which have all-male executive committees. Writing to these companies, the review asked them how they plan to improve the gender balance by outlining what actions they will be taking. Denise Wilson, chief executive of the Hampton-Alexander review said, ‘Despite moving in the right direction, too many companies are not making progress quickly enough’.

Overcoming the lack of ethnic diversity appears to be even more challenging. According to the 2020 Parker Review, 59% of the 256 firms within the FTSE 350 it surveyed did not meet the target of having at least one director of colour on their board. This means that more than half of the largest companies in the UK do not have a director with a BAME background on their board. The review also revealed that overall just 9.7% of director positions in the FTSE 100 are filled by people of colour. These shocking statistics show that companies are not doing enough to address the racial imbalance of their boards, and these boards do not reflect the diversity of our wider society.

Small companies are falling behind

It is the larger companies that are making the most headway in tackling issues surrounding board diversity, leaving smaller companies to play catch up. A report by Company Matters found that of the 100 largest companies of the FTSE Small Cap index, only 28% have a female director on their board. This drops down to just 15% for the top 50 AIM companies. The figures for ethnic diversity are even worse: at least 96% of directors of AIM 50 companies are white and 80% of boards are all-white.

The Company Matters report also found that AIM companies that follow the UK Corporate Governance Code (UKCGC) rather than the QCA code are slightly more likely to have a clear board policy on diversity. The UKCGC requires companies to have a board appointment process that supports a diverse pipeline and includes a strategy for gender balance at the senior level. This finding suggests that the regulatory pressure can be a driver for change.

Additionally, large companies often come under more scrutiny from the media, investors and general public, which can pressurise them into making changes. Without the fear of public scrutiny, there is less incentive for small companies to alter their board structures.

Shaping a change in mindset

The Goldman Sachs announcement was met with general positivity from the media. However there were others that were more critical – the sceptics out there argued that David Solomon’s speech was a marketing ploy to boost the bank’s reputation, making them appear progressive and committed to social change.

Nevertheless, many studies conclude that businesses are likely to perform better financially when its management and workforce is more diverse. When businesses are more diverse and include employees from a range of different socioeconomic, cultural and ethnic backgrounds, there is a greater capacity to foster creativity and innovation. A Boston Consulting Group study found that companies with more diverse management teams have 19% higher revenues due to innovation.

Whilst diversity quotas may initially seem like a box tick checking exercise, the hope is that over time the corporate mindset will change. Companies will see the real value of diversity in their management and workforce, and will seek to build gender-balanced, multicultural businesses. As attitudes change, diversity and inclusivity will be accepted as part of the norm, and companies will choose to diversify their boards not out of necessity, but out of desire to be innovative and successful.

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