Time for change: diversity dynamics in the boardroom

December 2020  |  COVER STORY  |  BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

December 2020 Issue

Diversity is one of the key buzzwords of our age. It is a concept deemed increasingly desirable across many spheres, particularly in the corporate world, where it permeates from the shop floor up to, and including, the boardroom.

Moreover, given the challenges corporates have had to face this year, the need for greater board diversity has, perhaps, never been greater. While many studies and analyses, bolstered by reams of anecdotal evidence, testify to a strong correlation between positive business performance and workforce diversity, a diverse boardroom remains largely the exception.

A 2020 report by the Parker Review Committee ‘Ethnic Diversity: Enriching Business Leadership’, which explores the ethnic diversity of UK boards, reveals that, as of 31 December 2019, 37 percent of companies surveyed in the FTSE 100 and 69 percent of the FTSE 250 have not met the target of at least one ethnic minority director on their board. In addition, only 6.8 percent of all FTSE 350 companies had directors of colour on their boards, with eight companies accounting for nearly 25 percent of those that do.

“While there has been some movement in reaching the targets set in the 2017 Parker Review Committee report, overall progress among FTSE companies has not been as expected,” points out Steve Varley, chairman of EY UK, a co-sponsor of the report. “Building a talent pipeline of high potential diverse leaders and pursuing an open approach to reporting on the diversity of your board can have a real impact on long-term culture. Clearly, more needs to be done.”

Echoing these sentiments is John Parker, head of the Parker Review Committee. “Compared to two years ago, more company boards are at least talking about their deficit in leadership,” he says. “A small number have actually gone beyond just talking about it, with 11 FTSE 100 companies making appointments that take them out of the all-white era. Women of colour have slightly outpaced the men – though neither group is yet anywhere near being represented in the numbers their talents deserve.”

In the US, corporate boards remain largely white, with racial and ethnically diverse leaders highly underrepresented or completely absent. “This would indicate that the guiding beliefs and ideals of the corporate culture do not prioritise diversity,” suggests Crystal E. Ashby, interim president and chief executive of the Executive Leadership Council (ELC). “We know there is an urgent need for diversity on corporate boards around the world. Studies show that greater board diversity brings profitability.”

One of the many studies examining the number of women in boardroom positions, the UK government commissioned ‘Hampton-Alexander Review 2019’ found that only 30 percent of non-executive directors in the FTSE 350 are female. A similar analysis by the Allegis Group, the 2018 ‘Talent, Business, and Competition: A New World of Diversity & Inclusion’ report, found that in Fortune 500 companies, women and minorities hold 31 percent of board seats. Although this figure is improving, albeit slowly, overall around 80 percent of board members are male.

“Boardrooms often do lack diversity in the broadest sense,” observes Leyla Okhai, chief executive of Diverse Minds UK. “There has been a lot of work done by the 30% Club, for example, to get women on boards. This is great, but women from similar social backgrounds, educational experiences and white British backgrounds do not necessarily mean it is a more diverse board.

“It is vital to look at a person as a whole to enable a questioning culture and illuminate blind spots,” she continues. “If everyone sees things from a similar perspective, then how can business improve? Boards need to be asked difficult questions from a number of perspectives in order to make the right decisions. You can only do this when people from a plethora of backgrounds and identities are represented.”

In terms of lesbian, gay, bisexual and transgender (LGBT) representation in the boardroom, multiple analyses confirm that LGBT employees continue to experience discrimination at corporate board level. According to Quorum, an Out Leadership initiative, only four Fortune 500 companies include sexual orientation as diversity criteria in their nomination and governance policies, and less than 0.3 percent of Fortune 500 board directors are openly LGBT. Such figures illustrate the size of the task to encourage companies to amend their governance guidelines to include LGBT diversity.

Correlation

Underlining the correlation between boardroom diversity and a company’s operational performance is the 2020 McKinsey & Company report – ‘Diversity wins: How inclusion matters’ – which found that companies in the top quartile for gender diversity on executive teams were 25 percent more likely to have above-average profitability than companies in the fourth quartile – up from 21 percent in 2017 and 15 percent in 2014.

“There is a growing body of evidence that shows diverse business leadership teams have better business outcomes,” says Sarah Galloway, an executive search and assessment consultant at Russell Reynolds. “A more diverse board will bring a wider range of viewpoints to the table, leading to broader and more robust debate about the issues at hand. This increases the chances that a business will better address the needs of all its customers, more fully understand the full range of risks in decision making and ultimately create a more inclusive and engaged culture for its employees.”

On the flip side, a less diverse board can make incisive debate less likely, leading to generally unproductive discourse. “A lack of diversity can result in a lack of understanding and inability to recognise new opportunities and challenges brought about by rapid COVID-19-driven change, particularly in diverse communities,” contends Linda Akutagawa, president and chief executive of Leadership Education for Asian Pacifics (LEAP) and chair of the Alliance for Board Diversity (ABD). “It also creates group think, an inability to discern unconscious bias, acceptance of conventional wisdom and trust in a narrow set of ideas.

“With the pace, style and expectations of business changing, innovative thinking, robust debate and thoughtful discussion will be imperative to achieve higher quality decisions,” she continues. “According to McKinsey & Company, diverse and inclusive companies are likely to make better, bolder decisions, which is a critical capability in a crisis.” Indeed, board diversity provides a competitive edge, with investors, consumers and top talent looking for diversity in companies as they assess them.

Diversity strategies

Boardroom diversity is very much about highlighting differences in approach and experience. To this end, one of the key areas for promoting those underrepresented at board level is the appointment process.

In the view of Ms Galloway, there are many areas companies can improve to access diverse talent. “Eliminate bias from role specifications, replace ‘culture fit’ with values alignment, be open to non-traditional backgrounds, be prepared to take someone with no previous board experience, carefully manage transitions to set new directors up for success, and use creative strategies such as ‘shadow boards’ to develop a pipeline of talent,” she suggests.

To ensure this pipeline is as diverse as possible, companies need to think differently about the criteria involved in appointing board members. “Do they have to have entire boards with people with 25-plus years’ experience in corporate environments?” asks Ms Okhai. “Reach out, do your homework, place adverts in different places. Have virtual open days and explain the process. Link with school leaver programmes and really challenge what is viewed as the ‘ideal person’ for the board – which will be shaped by our experiences of the people we currently see on boards.”

According to the Women on Boards’ report ‘Shifting the dial on diversity and inclusion: a six-point plan’, in order to ‘shift the dial’ on entrenched boardroom diversity thinking, companies should implement the following six steps as part of a boardroom appointment strategy.

First, start at the top. Diversity in the boardroom is paramount to gain the diversity of thought that drives quality decision making. Consider whether your non-executive directors represent your stakeholders in terms of background and demographics. Is there expertise in change, culture, inclusive leadership, recruitment and diversity within your board?

Second, define and lead a change programme. A clear vision of diversity business benefits will get initial buy-in, but behaviour, decisions and priorities will generate the belief needed for a change programme to succeed. Ensure the board is regularly updated on progress and metrics in your diversity efforts and that executives have diversity key performance indicators (KPIs), division by division, linked to their remuneration.

Third, invest in inclusion. Inclusion is important as without it you cannot reap the benefits of a more diverse team. If you get inclusion right, employees become more engaged and share divergent viewpoints which are well-managed to generate innovation. If you get it wrong, retention particularly of diverse talent suffers, as they do not feel valued and able to progress in line with their performance.

Fourth, understand your data. Every organisation will differ in its specific diversity and inclusion challenges. You cannot make improvements if you do not first understand the issues, and how they vary in each region and division.

Fifth, support ambition. Ambition and talent are equally distributed across diverse groups, but the information and opportunity needed to progress is not. Underrepresented groups do not need training to become more like a majority group but do benefit from understanding the strategies for career progression which research shows are effective. Integrating non-executive board roles early on in a career can develop the strategic skills needed to move into senior leadership – at little cost to your company.

Sixth, remove blocks to diversity in your talent pipeline. Your data will show which career stage underrepresentation of certain groups beds in. This differs by industry – for some it is entry-level while others find gaps arise mid-career. Policies such as flexible working, paternity support and returner support can be effective in closing mid-career gaps. For industries that experience entry-level gaps due to underrepresentation in education, partnering with organisations to offer funding, work experience or inspiration and visibility to underrepresented groups is advisable.

“In addition to these strategies, companies should establish trusting relationships and partnerships with business, leadership and professional organisations that serve racial, ethnic and other diverse communities,” suggests Ms Akutagawa. “These organisations often have a deeper and wider network and have a stronger pulse on the capabilities of potential, board-qualified candidates. These organisations will not put their organisational brand or reputation in jeopardy by recommending or endorsing those who would not be a strong candidate match.”

Expectation

Today, the pressure on companies to be more diverse and representative in the boardroom is intense. To embrace the benefits that greater diversity brings, companies are reviewing their policies and procedures, ably supported by a burgeoning number of campaigns, movements and initiatives.

For example, in the UK, Lord Karan Bilimoria, the Confederation of British Industry’s (CBI’s) first ethnic minority president, is spearheading an initiative to make FTSE 350 boardrooms more diverse. Called ‘Change the Race Ratio’, the initiative has set a target for at least one racially and ethnically diverse board member at every FTSE 100 company by the end of next year and at every FTSE 250 firm by 2024.

“There will be an increasing demand for the leadership of companies to reflect the world they operate in, meaning a greater focus on ethnic, as well as gender, diversity,” expects Ms Galloway. “This is reinforced by the Black Lives Matter movement together with the Parker Review target in the UK of ‘One by 21’. Evolving workforce engagement strategies and a focus on diversity below board level means the role of a board member will go further than ever before.”

Across the Atlantic, movements such as the Board Diversity Action Alliance and the Board Challenge are accelerating the drive for greater diversity in US boardrooms. Such movements, supported by legislation in five US states, with additional legislation being considered in five other states and by the US federal government, are compelling conversations about boardroom diversity and fuelling the expectation that boards will be diverse now, not later.

“The volatility and complexity of business and societal issues in today’s world demands a more diverse boardroom to help organisations drive successful outcomes for a wide range of stakeholders,” concludes Mr Varley. “Given its importance to creating a sustainable, high-performing business, diversity needs to have its place permanently on the boardroom agenda.”

© Financier Worldwide

BY

Fraser Tennant