What’s the current position?
Boardroom diversity: Why does it matter?
Scrutiny of boardroom diversity is nothing new but a flurry of announcements this year indicates that the pressure to address the makeup of leadership teams is only going to increase for UK companies, writes Nicholas Le Riche, partner, BDB Pitmans employment team
The Investment Association (IA), which represents investors managing around £8.5 trillion, announced in February 2021 that it will issue red-top alerts (signalling a high level of concern over a company’s behaviour) to FTSE 350 companies where 30% or less of their boards comprise of women and amber warnings (identifying a significant issue) where companies fail to disclose their board’s ethnic diversity, or a ‘credible plan’ to achieve ethnicity targets. The IA has over 200 investment manager members and therefore wields significant influence over investment in UK companies.
The IA’s approach is indicative of an increasing focus by institutional investors on companies’ diversity strategies and follows on from Legal & General’s notification to the FTSE 100 in October 2020 that it would openly vote against the re-election of a company’s chairperson or head of their nomination committee, if the company does not have at least one black, Asian or other minority ethnic board member by January 2022. In a possible sign of things to come for the UK, Nasdaq-listed companies in the US (with some specified exceptions) will soon be required to publicly confirm whether they have at least one woman board member and one other director who self identifies as an ’Underrepresented Minority‘ or LGBTQ+ or, if not, explain why this is the case. Given the current direction of travel on this issue, lack of boardroom diversity has the potential to pose significant corporate governance issues for companies.
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The two main reports on UK boardroom diversity in recent years are the Hampton-Alexander review on gender balance and the Parker review on ethnic diversity. The final report of the Hampton-Alexander review, published in February 2021, confirmed that there were no all-male boards in the FTSE 350 and just 16 had only one woman as a director, with women holding 34.3% of all board positions. While the review acknowledged that the representation of women on FTSE 350 boards had beaten its target of 33% by the end of 2020, it highlighted that there was still more work to be done on this issue, since almost a third of FTSE 100 boards did not meet the target and too few women were CEOs, finance directors or Chairs. Following the publication of its report, the Hampton-Alexander Review, together with the IA, wrote to the 63 FTSE 350 companies who either had no women or just one woman on their board (so called ’one and done‘ companies), or those that had all-male executive committees, outlining concerns about the lack of gender representation and asking them to summarise the action they were taking to ensure they met the review’s targets.
In its March 2021 update, the Parker Review reported that as at 2 November 2020, 74 FTSE 100 companies had a director from a minority ethnic group on their board. While the number of boards with ethnic representation had increased significantly from the year before, the Parker Review identified similar concerns to the Hampton-Alexander Review in that progress remained slow regarding representation in the key functional roles, with only five ethnic minority directors in a CEO position, two in a Chair role and four in a CFO role.
It is worth noting that the FTSE 100 and 350 are not necessarily representative of the UK corporate landscape and that smaller listed companies, whether on the main market or AIM, as well as private companies, often do not have such diverse boards. It is therefore important that steps taken to improve diversity and inclusion within the FTSE 350 are adopted more widely by companies of all sizes.
finance
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