Friday 16 October 2020 12:55 pm Apater Capital Talk

Boardrooms and ethnic diversity: finally, momentum?

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City A.M. contributor

Britain’s largest companies’ progress towards having more ethnically diverse management has been sluggish. But are things about to speed up? 

The Confederation of British Industry (CBI) began the month by revealing plans for a campaign aimed at boosting racial and ethnic participation in senior leadership.

Alongside companies including Aviva and Microsoft, the CBI is preparing to launch ‘Change the Race Ratio’, urging businesses to set – and publish – targets for greater racial and ethnic diversity at the board, executive committee (‘exco’) and ‘exco minus one’ levels. 

Further companies are being contacted to sign up to the campaign, which will launch later this month. They would need to make four commitments in line with the recommendations of the independent review by Sir John Parker into ethnic diversity of UK boards published in 2016

The pledges include that FTSE 100 firms should have at least one racially and ethnically diverse board member by the end of 2021 (the FTSE 250 have the same target by 2024); to also take action at exco and exco minus one, setting ‘clear and stretching targets’ (and publishing them); and to disclose ethnicity pay gaps by 2022. 

‘Painful’ lack of progress

Senior business figures launching the CBI-led campaign were damning in their verdicts on progress since the Parker Review. 

The lobby group’s president Lord Karan Bilimoria described movement as having been “painfully” slow. Linklaters’ Gideon Moore spoke of a “woeful” lack of racial and ethnic diversity across company boards and leadership roles.

At the start of this year, an update to the Parker Review itself lamented “slow progress”: 37% of FTSE 100 companies surveyed (31 out of 83 companies) did not have any ethnic minority representation on their boards. Additionally, 69% of the FTSE 250 companies analysed (119 out of 173 companies) were in the same boat.

The latest research from McKinsey, meanwhile, concludes that the business case for inclusion and diversity is ‘stronger than ever’. Its 56-page ‘Diversity wins: how inclusion matters’ report, published in May, showed not only that the business case remains robust but also that the relationship between executive teams’ diversity and the likelihood of financial outperformance has strengthened over time. Its research looked at more than 1,000 large companies across 15 countries.

‘Falling far short of investors’ expectations’

Beyond the CBI campaign, there are further signs of mounting scrutiny, transparency demands – and potential action. The Investment Association (IA), for example, just last week called for greater transparency on boards’ ethnic diversity, saying that almost three-quarters of the FTSE 100 failed to report the ethnic make-up of their boards during this year’s AGM season.
“FTSE 100 firms are falling far short of investors’ expectations when it comes to reporting the ethnic diversity of their boards,” said the IA’s chief executive Chris Cummings. “We’ve seen good progress on gender diversity when companies have held up the mirror to themselves and listened to investors’ concerns. Companies now need to take urgent action and report on ethnic diversity on their boards. Those who fail to do so will find themselves under investors’ spotlight.”

Significantly, one of Britain’s biggest institutional investors, Legal & General (L&G) Investment Management – an IA member – has written to all FTSE 100 companies (and indeed all US companies in the S&P 500) saying that it expects them to have appointed at least one BAME director by the start of 2022, according to recent reports.

The asset manager is planning to start voting against FTSE chairs from 2022 if their boards have failed to meet the Parker ethnic diversity targets. 

As the clock ticks, signs of momentum? 

In City AM in February, Sir John Parker himself wrote that ‘One by 21’ was a target that seemed realistic in 2017, but that three years on and it was less clear whether the ambition was achievable.

One positive development was that 11 further FTSE 100 companies had appointed an ethnic minority director to their board, compared to when his review took place.

Speaking to City AM this week, Sir John sees parallels with the push for boards’ gender balance: “Momentum built over time with that, and I see a not dissimilar pattern here.”

As the clock ticks towards 1 January 2022 Sir John welcomes the CBI campaign and L&G’s move: “L&G are first out [the blocks], and I suspect others will follow and [this position] could be unified across investors in due course.”

He has seen progress in the mining sector and hopes that the pace will quicken across all industries. “COVID-19 has, to an extent, slowed recruitment onto boards. But all the big mining firms now have ethnically diverse boards. I expect we’ll see more companies moving to do so,” he says.