Sustainability reporting: latest development and leading practices
The focus on boardroom diversity has, to date, concentrated on publicly quoted companies, for example: the Hampton-Alexander Review on gender, the Parker Review on ethnicity, and Legal & General Investment Management’s recent statement on voting intentions. However, there are around three million active companies in the UK, with which are associated the vast majority of board directors. To date there has been little attention paid to this majority.
Let us remind ourselves why diversity and inclusion (D&I) is important beyond the obvious societal benefits. Firms are able to understand their customers and other stakeholders better, and therefore make more informed business decisions, by having different relevant experience around the board table. These better decisions are likely to increase the bottom line. McKinsey’s 2015 Diversity Matters report “found a statistically significant relationship between a more diverse leadership team and better financial performance”.
Analysis of different business sectors would be likely to reveal different D&I practices – the construction sector may differ from entertainment which may differ from healthcare and so on. The extent and nature of initiatives to address any weaknesses in each sector could be identified and co-ordinated by relevant industry bodies. For example, the Corporation of Lloyd’s, which oversees the Lloyd’s insurance market, has established a Culture Advisory Group to promote greater D&I in the marketplace. It has started to publish a culture dashboard to encourage greater progress.
As a pilot exercise for a more extensive analysis, two sub-sectors of the UK financial services industry are considered here: financial mutuals and Lloyd’s of London insurance market Managing Agents.
Of course, true diversity involves much more than gender and other physically observable personal characteristics. We can, however, gain valuable insights into progress in the diversity of board appointments in aggregate by looking at available information from a variety of public sources along dimensions of: gender, broad ethnic group, age and date of appointment. This also serves to test a suggestion that when search firms and nominations committees consider if a candidate would be a good ‘fit’ with the existing board there is an inherent bias towards ‘someone like us’, particularly when appointing independent NEDs.
Research findings
In randomly selected samples of 30% (15) of the 50 Association of Financial Mutual Full Member Firms and 35% (19) of the current 54 Lloyd’s Managing Agents, 103 new Independent NEDs have been appointed over the five years to Summer 2020. Recent appointments, rather than all current INEDs, were analysed as this gives a better view of the trend (the picture would show even less diversity if all current INEDs had been considered).
Of the 103 INEDs appointed in the last five years in the 34 randomly selected firms:
- 99% (102) are white
- 77% (79) are men
- 23% (24) are women
- 1% (1) is an Asian woman
- Zero black or Asian men have been appointed
- All were middle-aged (45+) or older at the time of appointment, with the exception of one woman
This shows that the gender picture is beginning to look more encouraging but, conversely, the ethnicity picture is plainly shocking.
The findings suggest that chairs and nominations committees, pro-actively assisted by search firms, need to make significant changes to their appointment processes and criteria. For example, in my own 40+ years of business experience in the UK, there is a wealth of suitably qualified professionals, for example, accountants, actuaries, lawyers from ethnic minorities who are clearly being excluded by traditional appointment approaches. The data also raises the question of whether the female appointments are being made from the same demographic or social groups as existing board members.
The requirement for relevant experience is key for any appointment but too narrow an interpretation of that requirement leads to a lack of diversity. Perhaps there should be a concerted effort also to focus on strategically important competencies such as digital acumen or entrepreneurship as part of the boardroom mix. This is likely to increase overall diversity, including ethnicity, social/educational background and age. Individual development plans could be expanded to close knowledge and experience gaps in other, more traditional areas.
Regulation by the Financial Conduct Authority (FCA) and, for some firms, the Prudential Regulation Authority (PRA) is a determining feature in UK financial services. This year, the two regulators have sent letters to chairs and CEOs of regulated firms asking them to ensure there is appropriate diversity at their firms. This was emphasised in a recent statement to the UK Treasury Select Committee by the incoming FCA Chief Executive, Nikhil Rathi, that if the FCA does not see progress supervisory action may be taken and proposed senior appointments at firms may be blocked.
The business and societal imperative to create more diverse boards has never been greater. Firms that meet this imperative are likely to reap rewards through a deeper understanding of their customers, more informed decision-making and stronger financial performance. Those that do not are more likely to be overtaken and replaced.
Written by Michael Bartholomeusz, Board Chair, NED and Board Advisor and NEDonBoard member
Related blogs:
NEDonBoard: Diversity & Inclusion press release
Culture, Diversity and Inclusion for Board Members
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Diversity, whether by gender or ethnicity is to be welcomed. Skills and experience are not limited by gender or colour and recruitment should reflect that. Would the Lehman Bros or RBS debacles happened with less testosterone on their boards.
However the requirement for reporting and regulation is the be resisted.