The Financial Conduct Authority (FCA) recently launched a consultation on proposed amendments to its Listing Rules aimed at improving diversity and inclusion on company boards and executive committees. In particular, they are seeking feedback on proposals to require listed companies to publicly disclose annually whether they meet specific board diversity targets, including in relation to ethnicity, and to publish the composition of their boards and most senior level of executive management. To understand why such proposals are necessary, it is important to consider the current state of ethnic minority representation in UK leadership, why diversity at senior levels is so vitally important and what steps can employers take to improve diversity.
How diverse is current leadership?
Earlier this year, Green Park, an executive recruitment and diversity consultancy, released the findings from their Business Leaders Index 2021 which disappointingly revealed that the number of Black Chairs, Chief Executives or Chief Financial Officers at FTSE 100 Companies has fallen to zero, inferring that “ethnic minority leaders are diverted towards the pathways least likely to lead to the top.”
Similarly, the 2020 UK Spencer Stuart Board Index looked at board composition in FTSE 150 companies and found that 8.3% of all board directors were identified as Black, Asian or minority ethnic. While the proportion of ethnic minority non-executives has increased to 9.6%, it halved among executive directors in the past four years from 5.1% in 2016 to 2.6% in 2020.
Green Park has also highlighted a decline in ethnic minority representation in the leadership pipeline from 10.7% in 2012 to 9% in 2020 indicating that representation in leadership is not set to increase significantly in the short term. Further, the TUC reported earlier this year that Black and minority ethnic workers were more likely to say that they have been unfairly overlooked for a pay rise or a promotion than their white colleagues.
The Parker Review 2017 set a ‘one by 2021’ target for Britain’s largest companies. That is, setting a target of employing at least one ethnic minority director on every FTSE 100 board by 2021. However, Green Park’s statistics show that even this conservative target is unlikely to be met. An update report from the Parker Review in 2020 found that 37% of FTSE 100 companies and 69% of FTSE 250 companies had not met the target and extended the deadline for doing so to 2024. This further demonstrates the limited progress being made in increasing ethnic minority representation at board level and a reluctance to make diversity within leadership a business priority.
Industry Stepping Up
Given the above and in the absence of Government action to address diversity matters regarding ethnicity, industry initiatives have stepped in to fill the gap. The Change the Race Ratio campaign, for example, aims to increase racial and ethnic diversity among board members and senior leadership by publishing targets for businesses to change their race ratio. It is led by the Confederation of British Industry and includes organisations such as Aviva, Deloitte, Microsoft and Unilever. The campaign is also calling for ethnicity pay gap reporting by the end of 2022 (see Bina Patel and Özlem Mehmet’s blog on why ethnicity pay gap reporting must remain on the agenda).
Legal & General Investment Management (LGIM) has warned FTSE 100 companies that there will be voting and investment consequences for those failing to have one board member from an ethnic minority background by January 2022. It has been reported that Chairmen and Heads of Nomination Committees of all-white boards will openly be voted against. LGIM set a positive example for accountability and action in admitting that: “We acknowledge that we have not advocated strongly enough on racial diversity to date… now is the time for action.”
In contrast to this proactive approach, a 2020 survey by PwC revealed that only 34% of the directors surveyed believed it was “very important to have racial diversity on their board”. Both NatWest Group and Lloyds Banking Group have set a target of increasing the number of Black staff in senior roles to 3%. However, many may question whether this goes far enough and how they are going to reach these targets. Increasing ethnic minority representation at senior levels should not be approached as a tokenistic means of avoiding reputational damage. It is important for business leaders to understand why diversity at senior levels is important and makes business sense.
Why is representation in leadership important?
There is both a moral and business case for improving diversity and inclusion at leadership level. There is increased demand from both employees and clients for responsible business and ethnic minority representation, as well as commercial benefits such as increased profitability.
The Forbes report on Fostering Innovation Through a Diverse Workforce emphasised the importance of diversity and inclusion as a formula for success. Diversity was identified as a key driver of innovation due to the range of perspectives and experiences which enable new ideas to flourish. A diverse company that retains and promotes employees from ethnic minority backgrounds is better able to attract top talent. The report found that if a company’s diversity and inclusion efforts are to be successful, senior management must be responsible for it and engage with accountability.
The Chartered Management Institute (CMI) estimates that the full representation of ethnic minority individuals across the labour market could be worth £24 billion a year to the UK economy. Benefits would include increased creativity, better problem-solving and decision making, increased profits, higher employer engagement and a better reputation.
McKinsey & Company have reported that diverse organisations are more likely to outperform less diverse peers in terms of profitability. They reported that the positive correlation between executive diversity and financial performance has only strengthened over time; in 2019, the top-quartile companies outperformed those in the fourth quartile in terms of profitability by 36%, which is an increase from 33% in 2017.
The business case is clear, a diverse workforce is more profitable as it leads to diversity of thought and perspective. To achieve this, change needs to start at the top. It is those in leadership positions who are able to influence decisions with regards to career progression, promotion and recruitment.
Steps employers can take to improve diversity in leadership
While targets are a necessary first step in improving diversity in leadership, they do not go far enough and cannot be set in isolation of action. Increasing diversity in boards cannot simply be a tick box exercise. Organisations must make systemic changes to truly support diversity at leadership level including:
- Recruiting diverse talent. This is a key aspect of increasing future representation of ethnic minority employees at leadership leave. Catherine Bourne’s excellent blog explores how employers can remove barriers to recruitment.
- Reviewing succession planning. Taking a proactive and long-term approach to identifying and developing potential future leaders from diverse backgrounds. Implementing mentoring schemes to support career progression into the executive pipeline.
- Making Diversity and Inclusion a central business strategy. Leadership should be responsible for Diversity and Inclusion strategies and held accountable for them. Progress in this area should form part of the key performance indicators of senior management, impacting their performance grades and pay.
- Critically assessing the corporate culture. Listening to the experiences of ethnic minority employees within the organisation and responding to and addressing any issues raised in a meaningful way.
- Implementing an anti-racism policy. This should set out what is considered to be racist behaviour and emphasise the company’s zero-tolerance attitude to racism in the workplace. There should be an accessible reporting system for employees to raise concerns and reports should be dealt with firmly and transparently to inspire confidence in the system.
Conclusion
The statistics show that there has been very little progress in improving ethnic minority representation at leadership level in the UK. This does not look set to change in the near future given the fact that the number of ethnic minorities in the leadership pipeline is in decline. Leadership must be more reflective of its diverse workforce in order to harness the commercial benefits of diversity, such as increased innovation and profitability. In order to achieve this, representation at senior level must be more than simply window dressing and achieve a genuine culture of inclusion and equality. It is hoped that new measures, including those now proposed by the FCA, will address this.
Further Information
If you have any questions or concerns about the content discussed in this blog, please contact Bina Patel, Eleanor Lynch, or any member of the Employment team.
About the Authors
Bina is an employment law specialist with considerable experience in dealing with all aspects of the employment relationship. She particularly enjoys dealing with equality and discrimination matters. She acts for both employers and senior executives across various sectors with particular expertise in the legal, financial and other professional services and higher education sectors as well as with luxury brands. Bina is a tough negotiator and a formidable litigator and regularly deals with claims in the Employment Tribunal helping to achieve the best results for her clients.
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