Bridging gaps: diversifying UK boardroom recruitment

June 2024  |  COVER STORY | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

June 2024 Issue

Landing a seat on the board is generally considered the pinnacle of an executive’s career – a chance to be part of the nucleus of an organisation, helping to make the decisions that may provide a crucial edge in today’s complex and competitive business environment.

But who are the people that inhabit the boardroom? What is their background? What skills and experience do they possess that makes them a suitable appointment? And how important a role does diversity play in creating an effective board?

First up, there is no clear-cut definition of boardroom diversity. But it is generally accepted to refer to a board with a variety of perspectives – skills, ages, genders, cultures and ethnicities. If each member brings a wealth of diverse experience to the top table, such a board can be a significant and measurable contributor across all sectors and industries.

“Diversity at boardroom level varies widely, depending on the country and industry,” says David Duffy, director and co-founder of the Corporate Governance Institute. “In some countries – typically the ones with established legal quotas like Norway and, very recently, the European Union – the level of diversity is higher. The first quotas in Norway were introduced as early as 1981 and applied to all publicly appointed boards, councils and committees.”

Generally speaking, however, the reality is that boardroom diversity across the globe is varied and full of gaps. Between public and private companies, the pace of change in boardrooms is not uniform and differs from region to region. Even within a single country, the state of boardroom diversity and the measures taken to address it are decidedly mixed.

Boardroom diversity in the UK

In the UK, the issue of boardroom diversity is a perennial hot potato. There continues to be considerable variation in the efforts made by companies, with FTSE businesses particularly under the microscope, to appoint diverse candidates to board level.

In its ‘Resourcing and Talent Planning Report 2022’, the Chartered Institute of Personnel and Development (CIPD), supported by Omni RMS, notes that while 61 percent of UK companies have a formal diversity policy in place and the majority are taking some steps to attract diverse candidates, only a third are “very or extremely active” in their efforts to appoint more diverse candidates to the board, while a similar proportion are “not at all active”.

In terms of the FTSE All-Share Index, while gender diversity programmes introduced by the 2016 Hampton-Alexander Review have helped push the proportion of women holding boardroom roles across FTSE 350 companies – from 9.5 percent in 2011 to 40.2 percent in 2023 – many companies are failing to meet agreed targets.

“The FTSE Women Leaders Review has set a goal for 40 percent female representation,” says Fiona Hathorn, chief executive and co-founder of WB Directors. “However, 19 percent of the FTSE 100 do not meet these targets, rising to 36 percent for the FTSE 250, 41 percent for the FTSE All-Share ex350 and 73 percent among the alternative investment market.”

In addition, the FTSE Women Leaders Review, along with the Financial Conduct Authority, have stipulated that of the four most influential roles – chief executive, chief financial officer, senior independent director or chair – one at least should be held by a woman.

And when measured in terms of race, board representation numbers go from poor to abysmal, observes Ms Hathorn. “The Parker Review report for 2024 has found that only 44 percent of the UK’s top 50 largest private companies had at least one ethnic minority director on their board, compared with 96 percent of FTSE 100 firms and 70 percent of those in the FTSE 250,” she adds.

And as part of the “journey toward securing the best of the best talent”, in its March 2024 ‘Improving the Ethnic Diversity of UK Business’ the UK government-backed Parker Review has called for FTSE 250 companies to have at least one ethnic minority board member by the end of 2024, as well as setting their own targets by the close of 2027 for the share of ethnic minority executives in their senior management teams.

Diversity advantages

The many facets of diversity – gender, race and ethnicity, as well as age, sexual orientation, gender identity and diversity of thought – have the potential to provide greater clarity and insight, burnishing companies’ ability to anticipate trends which ultimately will lead to sustainable business success.

“Companies with diverse boards tend to outperform those without,” concurs Elise Perraud, chief operations officer at NEDonBoard. “Diverse perspectives support constructive and healthy debates, which lead to better decision making and innovation.”

According to Directorpoint, regardless of where current statistics may fall, the benefits a diverse boardroom offers are wide and valuable, including those outlined below.

First, a diverse boardroom provides diversity of thought. All board members bring their own personal background and experiences to their position in the boardroom. Each individual mind is capable of offering unique ideas, solutions and strategies. For boards with a more diverse membership, the breadth of personal experience is wider and more comprehensive.

Second, a diverse boardroom helps address complex corporate issues. A board needs to constantly challenge itself to keep pace with changing dynamics. This is best done through a robust dialogue of differing views that should be offered respectfully and listened to carefully. Multiple views on the possible outcomes of an action result in a more thoughtful decision-making process.

Third, a diverse boardroom is more representative of shareholders. Since boards exist to serve the best interests of shareholders, it makes sense that board membership should reflect the diversity of those very same shareholders. Not to mention, a diverse boardroom is also more reflective of the base of potential clients or customers.

Lastly, a diverse boardroom increases revenues. Companies with diverse boardrooms are outpacing more homogenous organisations in profit growth. For companies ranking in the top quartile of executive-board diversity, higher levels of gender diversity on boards positively correlate with better future financial performance as measured by earnings before interest, taxes, depreciation and amortisation.

“There is an established body of evidence to support the fact that diverse teams are more innovative, likely to be more reflective of the customer base they are trying to attract and can even impact a company’s bottom line,” says Ms Hathorn. “A McKinsey study revealed that companies with the most ethnically diverse executive teams were 33 percent more likely to outperform their peers.”

Common recruitment mistakes

A common mistake in boardroom recruitment is having a homogeneous board that lacks diversity in terms of gender, race, ethnicity, age, expertise, perspective and experience. This failing has the potential to foster bias in the recruitment process and thus hinder the appointment of more diverse candidates.

“There needs to be clarity around the kind of diversity a company requires to help shape the search process,” contends Mr Duffy. “Many candidates will be wary of being the ‘token’ candidate on the board, so it is challenging to convince would-be candidates that this is not the case.”

One obvious, common, recruitment mistake is for a company to appoint someone from a targeted background and then provide no follow-up or opportunity for development; for example, a lack of intersectionality, such as when a young black female enters the boardroom.

“No matter the candidate, this kind of recruitment is not good business practice – it is ‘phoning it in’,” says Mr Duffy. “Failing to have a diverse board means letting this kind of mindset gap continue. This means companies are missing opportunities and key risks as their business evolves. It is a crucial – and very basic – governance failure that should immediately raise red flags.”

For Ms Hathorn, it is also important for companies to avoid recruiting the ‘usual suspects’. “This is not about giving women or underrepresented groups preferential treatment,” she explains. “It is a shift in focus to turn off the spotlight on familiar types of non-executive, and turn the floodlights on the full range of talent that can add value to a company’s board.

“It pains me to say, but one of the most popular methods for recruiting new board members remains referrals from existing board members,” she continues. “If we are to accelerate progress then it is vital that boards look beyond their existing networks and actively create new opportunities for women, people of colour and other typically underrepresented groups.”

Additional factors that could impact companies’ boardroom recruitment strategies include activist investor pressure and shifting consumer sentiment around diversity, equity and inclusion (DE&I). “It has been growing for years and is unlikely to stop,” notes Mr Duffy. “Indeed, younger staff are more likely to join organisations that have DE&I at all levels; it is a sign of the great shift in work culture and outlook.”

Diversifying recruitment strategies

To engage and then appoint those currently underrepresented in their boardrooms, there are best practices to help recruiters establish a more equitable playing field and bridge the gap between aspiration and reality.

“Companies need to ensure they are drawing on inclusive recruitment strategies at every point in the recruitment process,” asserts Claire McCartney, senior policy adviser, resourcing and inclusion at the CIPD. “Recruitment processes should be redesigned to reduce the influence of bias.

“Clear, objective, structured and transparent processes are fairer for candidates, support more equal outcomes, enable employers to attract more diverse talent pools and select the most suitable candidates for the role,” she continues. “Even small changes to processes can have a big effect on who applies and who is selected, as well as improving the candidate experience.”

According to CIPD guidance, the requirements of the role should be clear, specific and behaviour-based. Biased language should not feature in job adverts. Flexible working should be offered and salaries and benefits made transparent. It is also important to use multiple recruitment channels to access a wide pool of talent, which are evaluated for their effectiveness, and that any assessment used is fit for purpose.

“True diversity recruitment is not just about selection, it is about empowerment,” suggests Mr Duffy. “As company’s look for candidates, they must craft a pathway from selection to onboarding and beyond, ensuring they have all the training, information and networks to succeed from day one.”

A key source of this empowerment is the tone from the top. “Chairs and nominations committees should demonstrate inclusive leadership and commit to diversity and inclusion,” attests Ms Perraud. “This means reviewing current succession planning and board appointment processes and investing in recruitment, development, training and education across all levels of the organisation.

“Organisations and their boards benefit from diversity as long as it comes with inclusion,” she continues. “Diverse perspectives need to be heard to improve decision-making and innovation. Unfortunately, boards that use diversity as a tick a box exercise or without ensuring that the voice of newly appointed diverse board members is heard, are exposing themselves to failure.”

Impetus for diversity

While the UK differs from the likes of France, Norway, India and a number of US states in that it has no mandatory quota system for boardroom appointments, fresh guidance, if not legislation, is being introduced in the UK that will promote diversity as well as intensify the pressure to appoint a diverse board of directors.

The latest of these is the Financial Reporting Council’s 2024 Code – which applies to financial years beginning on or after 1 January 2025, with first reporting in 2026. A key principle of the Code is a shift to ‘outcomes-based reporting’, meaning stakeholders are to be provided with information on how decisions taken by the board have, and will, impact the company’s strategy, objectives and long-term viability.

“The Code makes boards more accountable for culture by not only requiring them to assess and monitor their company’s culture, but also how the desired culture has been embedded – an enhanced focus that will be key for boards to address in the years ahead,” explains Ms Hathorn. “Successfully attracting a diverse workforce has never been more important for companies hoping to attract the best and brightest new workers. Now more than ever, Gen Z candidates consider a company’s commitment to diversity important when choosing an employer.”

Undoubtedly, one of the biggest factors likely to intensify the pressure on companies in many countries, and organisations in European countries in particular, to be more diverse in their boardroom recruitment strategies is the law.

“Many EU member states have already introduced minimum thresholds for the number of women on boards,” affirms Mr Duffy. “When faced with rules like this, a company will need to either comply or provide a good reason why it could not. Again, transparency is crucial here. 

“Other factors that could impact companies include activist investor pressure and shifting consumer sentiment around DE&I, which has been growing for years and is unlikely to stop,” he concludes. “Indeed, younger staff are more likely to join organisations that have DE&I at all levels. It is a sign of the great shift in work culture and outlook.” 

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Fraser Tennant