By Emma Bartlett
Businesses today operate within a highly competitive and fast-moving global marketplace. For all of the benefits that this brings, it also presents significant challenges – challenges which have only been compounded by the pandemic-induced turmoil of recent years. In this landscape, a strongly performing board is more critical than ever to the success of a business, and diversity at board level is increasingly recognised as a key driver of that performance.
The financial services sector is no exception. At a regulatory level, in early 2022 the UK’s Financial Conduct Authority (“FCA”) is expected to announce whether it will implement proposed rule changes that would require certain financial services companies to disclose annually, on a comply or explain basis, whether their boards meet specified diversity targets. In its consultation on the proposed changes, the FCA explained that it was considering targets of 40% of a given board being women, at least one senior board position being held by a woman, and at least one member of the board being from a non-White ethnic minority.
The UK is far from alone in this regard. For example, in August 2021 the US Securities and Exchange Commission approved new listing rules proposed by NASDAQ, which require certain listed companies to publicly disclose board diversity statistics, to have a minimum number of “diverse” directors, or explain why they do not. In Hong Kong, SEHK published a consultation paper in April 2021, which contained proposals that would implement various expectations and requirements concerning board diversity. The Financial Services Agency in Japan published a consultation on diversity in Senior Management in April 2021, Singapore has established the Council for Board Diversity to increase female representation on boards, and Australia already sets diversity targets for companies listed on the Australian Securities Exchange.
With the foregoing in mind, the push for greater board diversity in the financial services sector raises the question – why try? Setting to one side the obvious – and important – moral case for greater board diversity, there is a growing body of research to suggest that there are practical and tangible benefits on offer to businesses that are able to achieve a higher degree of diversity at board level.
Before proceeding, it is also important to note that diversity is an incredibly broad concept. Much attention in recent years has, for good reason, been paid to increasing the representation of women on company boards. However, achieving greater board diversity in the financial services sector also means, for example, increasing the representation of people of minority ethnicities, from less-privileged socioeconomic backgrounds or with neurodiverse characteristics.
Where gender diversity is concerned, perhaps the strongest correlation in the research is between more gender-diverse boards and more positive corporate governance and firm conduct outcomes – from reduced misconduct to fewer financial reporting mistakes. Similarly, there is some evidence to suggest that more gender-diverse boards achieve better risk management and, especially where a “critical mass” of women is achieved, better performance outcomes. For both gender and ethnic diversity at board level, there is also a growing body of evidence to suggest that this may be a factor in businesses achieving greater innovation.
Speaking in more general terms, where boards are able to draw on a broader range of expertise, backgrounds, and skillsets, there will in a number of respects be a deeper pool of knowledge to draw from when making difficult and critical decisions at board level.
The effects of diversity at board level may also trickle-down to the wider workforce. Starting at the management level, increased board diversity, including cognitive and socioeconomic diversity, may enhance mentoring and oversight of management. This might especially be the case where management is supervised by directors with whom they do not have prior relationships. The benefits of more effectively mentored and monitored management will in turn filter down through the organisation.
Similarly, the fostering of diversity and inclusivity at the very top of a business can trickle down in a way that improves diversity and inclusivity throughout the organisation. Although inclusivity is not a well-measured concept, there is some evidence to support there being positive practical benefits for businesses that achieve inclusivity. For example, employees with greater feelings of inclusion tend to work for businesses that outperform the S&P500. Further, one study found that as the number of employees answering “prefer not to respond” in surveys about their sexual orientation and disability status increased there was a corresponding drop in employees’ faith in management, sense of safety in the work environment, and in signs of teamwork – all of which are drivers of company performance and innovation.
Looking beyond the organisation, one of the best possible ways for a business to demonstrate its commitment to diversity, to current and potential investors, customers, and employees alike, is to embed diversity at the highest level of its corporate structure. In a global marketplace where Environmental, Social, and Governance factors are increasingly at the forefront of minds, not least of all the minds of investors, there is clear scope for rewards to be reaped when it comes to publicly demonstrating a commitment to diversity at board level, and likewise opportunities to be missed for businesses that cannot.
The research in this area is, by no means, conclusive. However, one benefit of the push by regulators around the world for greater transparency around board composition and diversity within the financial sector is likely to be a stronger body of evidence for researchers to engage with.
It is also important to note that achieving greater diversity at board level is only the first step to realising the potential benefits that diversity has to offer. Without pairing a diverse board with a healthy board culture that encourages a diverse range of opinions to be voiced, any practical benefits of diversity may ultimately be muted. In a recent survey of 700 directors, nearly half of respondents said that they found it difficult to voice a dissenting view in the boardroom. Plainly, this is a real challenge for businesses to address for a variety of reasons, not least of all with respect to harnessing the potential benefits that diversity has to offer. Companies should work to ensure that their board-members, whatever their backgrounds or characteristics, are encouraged and enabled to voice diverse perspectives and that those perspectives are embedded in the board’s decision-making process.
Notwithstanding the potential benefits of board diversity, it should be noted that much of the improvement in board-diversity in the UK, when looking at the FTSE 350 companies, has principally stemmed not from pursuit of these benefits but from external pressure. Not least of all, public scrutiny of boards that failed to meet the voluntary target of one third of women on boards lobbied for by the Hampton-Alexander review was a crucial driver of change. In the same vein, this target and the publicity around it has enabled shareholders and investors to push diversity higher-up board agendas, and these groups have themselves had a major influence on diversity. Lastly, executive board recruiters have been instrumental in expanding the selection of available board candidates beyond the same, typically non-diverse, talent pool.
If as expected the FCA’s proposed rule changes, as discussed above, are implemented in the near future, we may expect that affected businesses will again want to avoid being publicly singled-out for failing to meet the new targets.
Lastly, it is worth addressing in brief the question of achieving diversity in the context of smaller companies. With fewer seats at the table, and potentially a smaller pool from which to draw board members, diversity can be more difficult to achieve. The FCA, and similar bodies around the world, have recognised this, for example by noting that more time may be needed to recruit diverse board members where small companies are concerned. Difficulties notwithstanding, the potential benefits of board diversity for small companies in the financial services sector are there to be realised if they are able to meet the challenge.
Although there is much more work to be done, both in terms of the research into the impact of diversity at board level in the financial services sector and in terms of achieving that diversity in practice, the direction of travel (not least of all at a regulatory or public level) seems clear. In the coming years, we may well find ourselves asking more often not simply what the benefits are to a business that is able to achieve greater board diversity, but what the costs are to one that is not.
About the Author
Emma Bartlett is a Partner specialising in employment and partnership law at leading employment firm CM Murray.
Emma advises on a varied cross-section of employment law matters, including unlawful discrimination, whistleblowing, equal pay, unfair dismissal, breach of contract, restrictive covenants, protecting confidential information, boardroom and partner disputes and claims under TUPE. She has particular expertise in dispute resolution and litigation, notably discrimination, bonus, whistleblowing and trade union issues. She is a specialist in contentious discrimination matters and handling high-value contentious claims for employers and senior individuals.