The Confederation of British Industry (CBI) recently issued a robust challenge to FTSE companies to increase racial and ethnic participation in senior business leadership in the UK. Its “Change the Race Ratio” campaign launches at the end of October and is backed by heavyweight commercial, academic and not-for-profit organisations including Aviva, BiTC, Brunswick, City Mental Health Alliance, Cranfield University, Deloitte, Linklaters, Microsoft and Russell Reynolds. The campaign sets out four key commitments organisations should make to drive better performance on diversity and inclusion, starting at the top with a call to increase the proportion of board directors from Black, Asian and minority ethnic (BAME) backgrounds. This is supported by three further commitments to:
- Increase diversity at senior leadership level
- Be transparent by publishing action plans and sharing progress in company reports
- Create an inclusive culture in which talent from all diversities can thrive
This robustly articulated and strongly backed campaign by the CBI has been launched amid a growing focus on diversity among investors and increasing rejection of racial inequality. It is a clarion call for UK businesses at all levels – not just FTSE-listed – that a proactive approach to improving board diversity is not just needed, but overdue.
The board diversity delta
Despite general recognition of the prevailing lack of diversity among board directors, the needle is stubbornly stuck on the issue of increasing the number of board directors with BAME backgrounds. As noted by the CBI, the 2016 Parker review into the ethnic diversity of UK boards recommended that every FTSE100 board should have a director from a BAME background by 2021; however, more than a third (37%) of FTSE100 boards do not currently meet this criterion, with 69% of FTSE250 companies having no ethnic minority representation. It is clear that this target will be missed. The figures are even more concerning when it comes to female representation from BAME backgrounds. Cranfield University’s “Women to Watch 2019” noted that only 3% of FTSE100 board directors are women of colour.
The imperative to shift the dial on board diversity
While all four of the CBI’s commitments will require businesses to address issues of culture, structure and transparency, the first commitment is the key to unlocking the rest by setting the tone from the top.
Increasing the diversity of boards is not just an issue of social justice and equality, which are considerations that must be firmly on all board agendas; it is also a factor in better corporate performance, with studies by McKinsey and others finding that more diverse boards are associated with stronger commercial outcomes, with boards in the top quartile for diversity having a 36% higher likelihood of above-average profitability than those in the bottom quartile.
Boards in the top quartile for diversity have a 36% higher likelihood of above-average profitability than those in the bottom quartile.
That is because a board that incorporates diversity of ethnic and social background, age and gender has access to a broader range of perspectives and experiences. Diverse directors contribute new ideas and points of challenge. This enables organisations to get a better view of the world in which they operate. In contrast, a monocultural and homogenous board risks suffering from groupthink and acting from a single point of view with little challenge to preconceived ideas. Such a board lacks the insight and agility to effectively serve the organisation and, in today’s volatile and complex world, this constitutes a material risk.
Building diversity into board succession planning
Businesses that aim to rise to the CBI’s challenge should start by looking at their succession planning model. Succession planning is foundational to good governance and aims to ensuring that the composition of the board evolves to best serve the organisation. It has often focused on identifying missing skills that would be of value to the board, but planning should also include diversity of perspectives that will help the organisation to thrive.
When scoping the profile of future board appointees, it is important that the criteria used are not unconsciously biased against diverse applicants. In its six-step guide to best practices in improving board diversity, the Equality and Human Rights Commission counsels against selecting candidates on the basis of intangible criteria such as “chemistry” and “fit”, recognising that such subjective factors tend towards groups appointing in their own image and therefore stifling diversity. Similarly, organisations shouldn’t rely on word of mouth or the personal networks of existing directors to identify potential candidates, but instead look outside of the immediate aegis of the organisation.
One way to reduce subjectivity in succession planning is to benchmark the board’s composition and skillset against peers in the industry to identify areas for improvement. Tools such as Diligent’s nomination and governance application leverage global data on boards so organisations can objectively see where they fit into their peer group on diversity performance. The app also includes access to the Diligent Director Network, a global database of board candidates that firms can use to expand their candidate search and home in on the skills and characteristics they need to build a more diverse board.
However, it is important to remember the need to not just equal peers on diversity. The current low numbers are not good enough. To truly shift the dial, organisations need to be bold by proactively seeking out and encouraging candidates from diverse backgrounds.
Creating connections and improving visibility: Driving a step change in director appointments
Improving board diversity is not just a case of firms widening search horizons when looking for new appointees; the corporate community as a whole needs to be proactive about championing BAME candidates, improving the visibility of open board positions and encouraging new talent to come forward.
Recognising this challenge at our recent Modern Governance Summit, we launched the Diligent Modern Leadership Initiative in partnership with Spencer Stuart and numerous private equity firms and diverse leadership organisations. Its goal is to connect the Diligent board community of over 700,000 CEOs, board directors and executives with qualified, diverse candidates and vice versa. Board members and corporate leaders can nominate rising directors from diverse backgrounds, or those who are not yet serving on boards, to become part of the Diligent Director Network, where their profile will be available in a global database of candidates that can be used by boards to identify new appointees. Conversely, candidates from diverse backgrounds can gain visibility into the open board positions that Diligent’s 21 private equity partners and five executive search firms have committed to posting on the Diligent platform.
Taking a systematic approach to diversity
Organisations responding to the CBI’s call to improve diversity will need to make a proactive and transparent commitment to achieving this goal. McKinsey’s analysis shows that the organisations making the furthest progress and reaping the most benefit from diversity are those that “are adopting systematic, business-led approaches to inclusion and diversity (I&D)”. That means setting targets, regular transparent reporting and also working to develop a culture that promotes diversity and inclusion at all levels. It is not an easy task, but it is a necessary one, and it has to start at the top.
Now is the time to act on board diversity to start building sustainable, representative and responsible boards that are fit to guide organisations into the future.
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