BOARDROOM BEST PRACTICES

Board diversity and Gender Balance in the Boardroom

An increasing body of evidence suggests that, when it comes to business, board diversity pays dividends. The latest study completed by global management consultancy McKinsey found that companies that were in the top quartile for gender diversity were 21% more likely to experience above-average profitability. Companies with the most ethnically and culturally diverse executive teams were 33% more likely to outperform rivals on profitability. It seems that, even apart from the moral issues of equal rights and social justice, businesses can boost their competitive edge by increasing diversity. As we mark International Women’s Day on the 8th of March, we take a look at progress in gender balance and ethnic diversity in the UK boardroom.

Conscious focus brings positive results for gender balance

The UK Government’s Hampton-Alexander Review reported that, in 2017, 28% of board positions in FTSE 100 companies were held by women. This is a substantial increase from just 12.5% in 2011 when the Davies Review set an initial target of 25% board representation by 2015, indicating that conscious focus bears fruit when it comes to female representation. During the same period, the number of all-male FTSE 350 boards dropped from 152 to just eight. The government aims to make the UK a world leader in gender diversity by having 33% of FTSE 100 board positions filled by women by 2020 and extending the target out to the FTSE 350.

Progression in improving ethnic diversity on boards is not as marked. The Parker Review into the ethnic diversity of UK boards released its final report in November 2017, recommending that FTSE 100 boards aim to have at least one director from an ethnic minority background by 2021 and for each FTSE 250 Board to do the same by 2024, in addition to developing pipeline career mentoring programmes to support BAME executives. This recommendation is an attempt to improve the current situation, where only 2% of director positions are held by people from ethnic minorities, despite this group representing 14% of the UK population.

A report by executive search company Green Park found that 58% of FTSE 100 boards had no ethnic minority presence in 2017, a slight improvement from 62% in 2016. For women from ethnic minority backgrounds, the situation is poor; of the 21 women who hold Chair, CEO and CFO roles in the FTSE 100, 20 are white. The report goes on to suggest that improving diversity could become a critical challenge for organisations in a post-Brexit climate where strong links to countries outside the EU could become critical in developing new markets.

Increasing board diversity – widening recruitment

Widening the pool of prospective candidates is critical to improving board diversity. While experience is naturally a key factor in a candidate’s suitability for appointment, the fact that the average age of directors now stands above the 60 mark, and that these directors typically hold an average of 2.8 board positions, shows that there is room for new, more diverse, younger candidates to step into the frame.

When developing a recruitment profile for a new position, organisations should be mindful of the current makeup, skills and experience of the board and take the opportunity to evaluate areas that should be strengthened and balanced. It’s an opportunity to start future proofing the board’s composition so that it is well-placed to navigate the likely challenges in areas from political, economic, technological and social development through legislative and environmental issues.

In its Six-Step Guide to Best Practice in Improving Board Diversity, the Equality and Human Rights Commission counsels against selecting candidates on the basis of intangible criteria such as “chemistry” and “fit”, recognising that such subjective factors tend towards groups appointing in their own image and, therefore, albeit subconsciously, stifling potential diversity. The use of external selection consultants is also recommended in preference to reliance on word of mouth or the personal networks of existing directors.

A culture of board diversity is more successful when it comes from the top

Evidence suggests that organisations are more successful at progressing towards gender balance when a pro-diversity culture is promoted from the top, with female board chairs, CEOs and CFOs typically presiding over more diverse companies. Clearly, however, this is a “chicken and egg” situation; consultancy Egon Zehnder finds that board gender diversity tends to be stronger in countries where cultural and societal change in favour of equality has already taken place.
Ensuring that this change continues to be reflected throughout organisations has to be a matter of policy and, since 2012, the UK Corporate Governance Code requires that companies incorporate diversity into board appointment decisions and annually update shareholders on progress towards achieving stated diversity objectives in the board’s composition.

Even so, success varies between industries. The burgeoning and disruptive FinTech sector, for example, although championing innovation on many fronts, is hamstrung by the male-dominated history of the banking and technology sectors that feed into it. Only 8% of directors on FinTech boards are women, compared with 22% of directors on the boards of the world’s 30 biggest banks. Blythe Masters, CEO of Digital Asset Holdings, explained to the FT the constant focus necessary to try to redress this imbalance in her own organisation: “I know what this company would look like if we weren’t constantly thinking about this issue – we would only have one female director.”

Seizing the initiative to develop diverse boardroom talent

In terms of driving boardroom change towards a more positive balance of female and BAME directors, the challenge remains that, “You can’t be what you can’t see”: Without specific initiatives designed to nurture talent through to the boardroom, progress is likely to remain slow. Firms that make it a priority to create or be involved in networking and mentoring programmes will see a stronger pipeline of potential candidates and will become more attractive to potential board recruits as a result. There are several strong initiatives in the UK, including the 30% club, the Mentoring Foundation (FTSE 100-focused), the energy sector-specific Powerful Women and, for the finance sector, Women in Banking and Finance. The Prince’s Trust responsible business network Business in the Community has designed a toolkit for mentoring that businesses can implement to help to develop their BAME employees through to the boardroom. In the NHS, public sector recruitment and people development specialists GatenbySanderson last year launched a mentoring programme to help people from diverse backgrounds become non-executive directors on NHS boards.

The progress made in UK boardrooms on gender balance since the Hampton-Alexander Review is encouraging and the aspirations of the Parker Review positive, although progress is less marked. What’s needed now is for boards to leverage the momentum towards diversity and to seize the initiative to actively aim to achieve the advantages of corporate governance, profitability and social responsibility that diverse boards can deliver. It’s a challenge that, if risen to today, will undoubtedly make for a better tomorrow.

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