Failure to improve ethnic diversity at board level carries investment risks

United Kingdom

Legal & General has written to all companies in the FTSE 100 and the US S&P 500 index outlining their expectation that they should have at least one BAME board member by 1 January 2022. If a company fails to comply, L&G has warned that it will vote against the re-election of the nomination committee chair (responsible for board appointments). This warning is not to be taken lightly: L&G is one of the UK’s biggest investment companies, owning around 2-3% of each FTSE 100 company.

Companies which are not part of the FTSE 100 should still take note of L&G’s actions. It signals that investors are no longer willing to tolerate all-white boards and are not afraid to use their voting power to push for change. In this Law-Now we outline the various government and business measures which are pushing for increased racial diversity, both at boardroom level and amongst the workforce, and what steps employers can take to achieve this outcome.

Parker Review

L&G’s ultimatum comes after the Parker Review, an independent review into the ethnic diversity of UK boards, recommended in 2017 that each FTSE 100 company should have at least one person of colour on its board by the end of 2021.

That ambition was billed as “One by ‘21”. The Review highlighted the disproportionately low BAME representation at board level: at the time of the report in late 2017, 51 FTSE 100 companies did not have a single BAME director on their executive board. 8% of the directors of FTSE 100 companies were people of colour, compared to 14% of the UK population as a whole.

An update to the Review was published this year, which noted that while there were early signs of progress, the “One by ‘21” ambition was looking very challenging. That update focused on the FTSE 350 and found that, of the companies which responded to the request for information, 59% had not yet met the target set by the Review of having one non-white director on their boards. The question now is whether L&G’s announcement will drive the change necessary to ensure that the ambition is met by 1 January 2022.

Any leader who still needs to be persuaded to take action to improve boardroom racial diversity, should be reminded that this is not just about appealing to investors, there are a number of reasons for taking action.  The Parker Review highlighted the following:

  • the more diverse the board, the wider and more varied their collective experience will be;
  • more diverse boards will be better able to represent their stakeholders;
  • increasing minority representation at board level will reflect and demonstrate that a company is truly committed to increasing diversity;
  • the more diverse the board, the greater the likelihood that it will be committed to attracting and promoting the best talent, regardless of race or other characteristics.

CBI

Another business group committed to increasing racial diversity is the CBI with the recent introduction of  their Change the Race Ratio campaign. Signatories to the campaign will be asked to meet the target set by the Parker Review of one BAME board member by the end of 2021. They are also asked to publish their ethnicity pay gaps and to set substantive targets for the racial and ethnic diversity of their executive teams. Several well-known names have already signed up to the campaign, including Aviva, Deloitte and Microsoft.

Ethnicity Pay Gap Reporting

We are still waiting for the Government to publish its response to the consultation on ethnicity pay gap reporting. Although the consultation closed in January 2019, there is still no timeframe for next steps with this process. It seems likely that at some stage in the future we will have a reporting regime similar to the current gender pay gap regime, but obviously taking into account the complexities around the classification systems that are used to define BAME employees. 

We have seen ourselves that the BLM movement has prompted many of our clients to rethink how they approach racial equality in the workplace. We have yet to see whether the BLM movement will prompt the government to prioritise introducing legislation on ethnicity pay gap reporting in the near future.  Many employers including NatWest and the Bank of England have seized the initiative themselves and have already published their ethnicity pay gaps.

Effectiveness of voluntary measures?

Delayed legislation aside, the effectiveness of voluntary measures like the CBI campaign and the L&G approach should not be underestimated. The success of the Davies Report and the Hampton-Alexander Review has resulted in a significant increase in female board members. In 2010 women made up 12.5% of the members of boards of FTSE 100 companies. The latest Cranfield 2020 Report reveals that this figure has increased over the last 10 years to 34.5%.

Employers who want to refresh their approach to racial equality at board level and amongst the wider workforce can take a number of positive steps.

Employees

  • Engage with your BAME employees, listen to their experiences at work and identify where barriers exist in your workplace. This listening exercise may take place with an existing BAME network, or this could prompt the introduction of a BAME network, but it is essential to understand individual and collective experiences of racial inequality at work and what needs to change.
  • Audit your staffing numbers and start collecting ethnic diversity data across a range of metrics.  It is only a matter of time before ethnicity pay gap reporting will come in. Understand how many BAME staff you employ, at what level of seniority and identify the ethnicity pay gap.
  • Consider whether you want to introduce positive action measures in your recruitment or training processes. Before doing so, the particular area of your organisation will need to satisfy the statutory requirements here which include low numbers of BAME staff or where there is evidence of disadvantage.
  • Conduct race equality training. Educate all staff on how to be better allies. Make it clear that you want to foster a supportive culture where even the most subtle forms of racism, (sometimes referred to as microaggressions), will not be tolerated.
  • Take steps to build cultural awareness with diversity managers and communication teams in the organisation through internal communication measures and give a voice to BAME role models in this process.
  • Have an effective equal opportunities and harassment policy and take disciplinary action against those who have discriminated or harassed a colleague because of their race.

Board level

  • Introduce ethnic diversity objectives (not quotas) around board and senior management level. Ensure that oversight for this is given to a senior person who drives change.
  • Introduce a board diversity policy which specifically covers ethnic diversity. Is there a Board diversity pipeline and succession planning which takes into account ethnic diversity?
  • Review your recruitment and hiring practices with executive search firms and outline your BAME objectives and board diversity policy.
  • One point that was raised in the Parker update published in February 2020 was that meritocracy is not the opposite of diversity – both priorities go hand in hand. The authors explained that when it came to the reporting of Board diversity policies there was “a reassurance that this would be implemented without compromising on merit. We suggest that this common conflation of diversity with reassurance of merit is an indicator of subtle bias that associates diversifying Boards with ‘lowering the bar’”.