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Corporate Diversity: Law, targets and Corporate Governance

Good Corporate Governance, and simple business sense, both acknowledge that it is crucial for boards to have the right balance of skills, knowledge and experience as well as gender, racial, and other forms, of diversity. Despite a significant cultural shift among UK businesses on equality for women, they are still under-represented at the Executive level and whilst recent focus has been on gender diversity at board level, the same applies to diversity in its widest sense, and throughout organisations.

The FRC’s guidance on Board Effectiveness recognises that diversity goes beyond just gender and race, and includes personal attributes including intellect, judgement, courage, honesty and tact; and the ability to listen and forge relationships and develop trust. This ensures that a board is not closely comprised of like minded individuals.

Our own research demonstrates that while companies appear to be keen to improve board diversity in these categories, only about one in five (22%) said they “very much” believed that there were enough qualified people available. So, what practical steps can companies take to ensure they have the right mix of skills, on the board and within the wider organisation, whilst satisfying the legal requirements relating to discrimination, diversity targets, the pipeline below board level and individual factors relating to their own business?

Legal Requirements

The Equality Act provides all employees (including those at board level) with protection from discrimination on the grounds of gender, race, age and a range of other protected characteristics. Importantly, the Act also prohibits positive discrimination and this include the use of quotas. Targets remain legal so long as they are not used to justify the recruitment or progression of a less suitable/qualified candidate simply because of that candidate’s protected characteristic.

Targets and transparency

Targets can help companies to focus on diversity when recruiting and managing their talent pipeline. Whilst quotas have been used in some countries to increase female representation on boards, they remain prohibited in the UK. Even in those countries that they have been used, they can result in tokenism, box-ticking and promoting people above their current ability levels, arguably reducing the overall effectiveness of board decision making; transparent targets, on the other hand, drive accountability and actions for progress.

Improved gender diversity at non-executive level has been achieved by setting voluntary targets and monitoring progress through reporting and there are various targets applicable to FTSE companies, but progress has been slow. The Davies review, which suggested 25% of female board directors by 2015, has been extended by the Hampton-Alexander review, which focuses on women in leadership roles across the FTSE350 and raises the target to 33%. The BEIS Select Committee Report, published on 30 March 2017, proposes that half of new senior executive appointments in FTSE 350 companies should be women from May 2020.

The Parker Review of ethnic diversity suggested that there should be at least one director of colour on FTSE250 boards by 2024 and that nomination committees should insist on the identification of people of colour for the purpose of vacancy shortlists. The Parker Review also focussed on the development and progression (including mentoring) of people of colour to strengthen a diverse pipeline of talented individuals, and disclosure by companies of the efforts they are making to improve diversity within the workforce.

Similarly, the McGregor-Smith Review on race in the workplace and the government's response to it make a number of recommendations to improve diversity within organisations. These include the publication of a breakdown of employees by race, ideally by pay band, setting aspirational targets and identifying a board-level sponsor for all diversity issues. To ensure this happens, companies are encouraged to reference what steps they are taking to improve diversity in their statements in the annual report.

Diversity is not, however, just a board issue. Businesses need to set challenging diversity targets at all levels of their organisations. Effective management of a talent pipeline at all levels is absolutely critical to boards being able to attract and recruit diverse skills and experience in the broadest sense, and ultimately enhance corporate performance. The most successful companies develop a pipeline of talent that provides equality of access and opportunity for promotion throughout the entire organisation.

The UK Corporate Governance Code already requires the nomination committee to describe the board’s policy on diversity, any related measurable objectives, and progress made against achieving those. The BEIS Select Committee's recent report also suggests that boards disclose information covering diversity of gender, ethnicity, social mobility and of perspective. The Report suggests that companies publish details on how accurately the board diversity mirrors that of the workforce and customer base.

It’s clear therefore, that the legislative requirements outlined above are strongly supported by targets and voluntary guidance, and that companies are being encouraged to disclose their diversity policies in an effort to drive a market led improvement in diversity in the workplace.

Corporate Governance

The growth in the size, complexity and nature of global businesses has led to a real demand for people with the right skills, knowledge and experience to perform effectively at board level, and our research has shown that Directors agree that it is essential to have a board with the appropriate mix of financial, industrial and operational expertise. The theory behind this being that it avoids the problems arising from “groupthink”.

The exact nature of skills and experience will, of course, differ depending on each company’s strategy and purpose; this alignment is key so that it does not become tokenism. It also seems irrefutable that board composition should also strive to reflect the stakeholders (including customers and employees) it serves in order to understand the needs of those groups and, in doing so, achieve the business’ purpose.

An effective way to achieve diversity is through the nomination committee. There must be clear roles and responsibilities at board and nomination committee level for both talent management for prospective board members, and for succession planning at board level. Organisations must clarify their definition of diversity and their objectives in this area. The nomination committee should play a key role in reviewing the existing board’s skills and composition, against the changing needs of the business; and this would typically form part of the annual review of board effectiveness.

Shareholders also have a role to play in encouraging the companies they invest in to focus on diversity, and some have diversity targets within their voting guidelines. In addition, as we have seen in respect of remuneration, shareholders are starting to use their voting powers when re-electing Chairs, and Chairs of committees (such as the nomination committee), to indicate dissatisfaction at diversity within the boardroom and beyond.

Practical steps

In summary, to encourage the diversity in the workforce, including at board level, that best serves the strategic objectives, culture and values of an organisation and their customers, companies should:

  • Ensure employee handbooks and employment policies comply with the Equality Act
  • Have a clear policy on diversity in the workforce, from recruitment to talent management and progression, and at all levels of the organisation
  • Be clear on what board composition best suits their needs, and review that regularly
  • Clearly allocate responsibility for diversity, at all levels of the organisation, to the nomination committee, or an individual director
    Set aspirational diversity targets, suitable for the specific needs of the business
  • Review headhunters’ or recruitment agents’ diversity policies and ensure they are aware of the company’s diversity policy

Be open and transparent about their diversity policy, aspirational targets, and progress against those targets.

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