ONE Black History Month
Introduction
October is Black History Month, a time to celebrate and honour the accomplishments of Black Britons and celebrate Black heritage and culture across the UK. It also provides organisations with an ideal opportunity to re-open the discussion on what they can do to facilitate the increase of ethnic minority representation at board and senior management levels.
Since the Black Lives Matter (BLM) movement in 2020, there has been a rise in social discourse concerning issues of racial inequality and the experiences of ethnic minority groups in western society with unprecedented global ramifications. Since then, society has become more attuned to the struggles of ethnic minorities in the UK and worldwide. The BLM movement also sparked commitment from organisations to educate themselves about Black history and culture with the aim to understand racism and work towards eradicating it. Despite this, increasing ethnic minority representation at board level has proven to be an ongoing challenge.
The Parker Review set a goal in 2017 to have at least one non-white board member in every FTSE 100 firm by 2021, with FTSE 250 companies following suit by 2024. While the Parker Review last year noted that “significant progress” had been made amongst the FTSE 100, far more progress was required amongst FTSE 250 companies. The FCA has recently adopted “comply or explain” reporting requirements for Premium and Standard List companies with specific diversity targets for boards in relation to gender and ethnicity, and a clear expectation of companies moving to compliance. The FRC has also moved to support diversity efforts with its recent report “Navigating Barriers to Senior Leadership from Minority Ethnic Groups in FTSE 100 and FTSE 250 Companies” looking at the obstacles to progress experienced by Black and minority ethnic groups in reaching the boardroom, and how those barriers might be dismantled.
Looking at smaller market cap listed companies and those on the AIM index, a recent report in 2021 found that ethnic minority representation at board level remained nearly non-existent. Looking at company boards in 2020, only three black directors were found among the 324 positions held on AIM UK 50 boards, none of whom were executives. The share of all-white boards is significant —84% or five out of six of the AIM boards analysed in the report were all white. 98 per cent of women directors in the reviewed boards were white. [1]
In recent years, the topic of diversity and inclusion in the workplace has extended to ensuring that companies increase the participation, performance, and compensation of minorities, not just hiring symbolically to tick a box. From a commercial perspective, companies have recognised the huge value that hiring a diverse range of individuals and personalities can add to their business.
The argument for diversity
The continuing discussion around board diversity raises a host of sensitive topics and involves a wide variety of stakeholders. Change is not easy. Nonetheless, there are clear arguments in favour of greater diversity in all its forms.
Firstly, in view of the importance of an ‘effective and entrepreneurial board’, it is important for the board of directors to guarantee effective engagement with the full range of the company’s stakeholders for the company to satisfy its duties to them (UK Corporate Governance Code, 2018).
Academic studies have shown a correlation and causality between greater organisational diversity and long-term value generation, and indeed greater heterogeneity in groups does mitigate against the risk of groupthink. It allows for different ideas to be developed from individuals who are from different backgrounds and have different experiences. It also pushes for the possibility of different types of conversations in the boardroom. Indeed, a recent study by decision-making platform Cloverpop found a direct link between inclusive decision-making and improved business performance. Teams that were geographical, gender as well as age-diverse made better business decisions 87% of the time.
Secondly, from a recruitment and retention perspective, people want to work and be associated with a company that has values that reflect theirs. Business is becoming increasingly globalised. Whether you're looking to open your markets to working-class communities, translating your core message into Hungarian, or expanding operations to New Zealand, hiring a more diverse team will give you the benefit of a variety of voices, backgrounds, and experiences represented around the table. Sir John Parker holds that boards who reflect their changing stakeholders and customer base will have a better success rate of engagement, as “75% of FTSE 100 revenues are earned outside of the UK, in markets which will include the nine countries, that will generate half of the world’s population growth between now and 2050 – five of which are in Africa and three in Asia”. From an AIM-listed company perspective, it has been estimated that around 20% of turnover of UK-incorporated AIM companies comes from overseas, a figure that has remained relatively consistent over the last five years. As business continues to globalise, boards will need to be increasingly global not only in their outlook but also in their composition.
Thirdly, the regulatory environment continues to put increased demands upon listed companies to make further commitments in respect of diversity and inclusion. As noted above, following a consultation process, the FCA recently changed the UK Listing Rules (LRs) to require most Premium and Standard List companies to annually disclose on a comply or explain basis whether they meet specific board diversity targets relating to gender and ethnicity. . Those targets are:
· 40 per cent. of board members to be women including one of the senior board roles of chair, CEO, CFO or SID.
· One member of the board to be from a minority ethnic background.
The new regime also requires companies to publish a numerical data table setting out the sex or gender identity and ethnic diversity of the board, senior board positions and executive management.
The FCA believes that by increasing transparency and improving data, companies will be able to assess their progress regarding diversity, improving shareholder engagement, investment decisions and enhancing market integrity, which will potentially lead to greater diversity on their boards over time and enhance corporate governance and company performance. The data collected will also highlight fundamental areas which need to be tackled and will establish what further measures the FCA need to consider in order to promote greater diversity within the boardroom. The new rules affect financial years commencing on or after 1 April 2022.
Finally, as we hear now on an almost daily basis, investors are increasingly making capital allocation decisions based on ESG factors, including companies’ approach toward diversity and inclusion. This translates into both boardroom diversity and the quality of disclosure on the company’s approach to diversity and inclusion. While there is no equivalent gender or ethnicity disclosure requirement for AIM companies, we would expect the pressure on AIM companies to voluntarily adopt this level of disclosure to increase, particularly at the top end of the market.
As per the above, we see that a number of factors are coalescing around the importance of ethnic diversity.
The speed of change
We have seen that large UK companies have stepped up in terms of securing greater gender diversity on boards and senior management teams in response to the Hampton-Alexander Review, which recommended 33% female representation on boards of FTSE 350 companies. What was recently seen as an aspirational target has now become a largely baseline figure for those companies. While more women still need to be appointed as Chairs and as executive directors, we can see that change is possible where there is a clear mandate and a clear roadmap to do so.
The “COVID-19 [pandemic] started as a public health crisis and quickly evolved into a financial and economic crisis of epic proportions, in some instances pushing organisations to devise new ways of working in a very short period of time” [2]. The pandemic was an apt demonstration of the speed at which many organisations can adapt, if necessary, to continue operating. From this standpoint, it could possibly be argued that organisations and their boards either do not see any benefits associated with ethnic diversity or they do not know how to implement effective policies for example that would improve ethnic diversity.
So what can my company do?
In celebration of Black History Month, here are some ways companies can look to boost diversity within their boards:
1. Establish a Junior Board
A junior or shadow board can be a strategic way for a company to invest in young professionals early on in their careers, steward them well and, as a result, create a strong pipeline of talent. Both companies and individuals benefit from this for the following reasons:
· Companies are given the opportunity to nurture upcoming talent;
· A junior board can be a great source of innovative ideas to support the main board to execute ongoing projects;
· Minority ethnics are provided with the opportunity to lend their talents as well as develop new skills; and
· It is a great opportunity for minority ethnics to meet mentors, advisors, and sponsors.
Evidence from recent years suggests that very few board directors have received formal development and training in understanding the roles, responsibilities, and intricacies of being a director in an organisation. Beazley Group, a London-based insurance firm, Gucci, and the NHS are amongst a few organisations that are investing into, and benefitting from, the fresh perspectives that junior boards afford them. A junior board is not only an excellent tool for succession planning, but also a very pragmatic strategy to nurture and expose minorities to the highest levels of operations while also affording them valuable experience in leadership, board governance, budgeting, and project management.
2. Increase transparency
Introduce a formal board diversity policy if you do not already have one. A diversity policy does not in and of itself deliver greater diversity and inclusion, but it does serve to help to secure internal commitment to the aims of the policy. The policy should ideally commit the organisation to quantifiable aims to enable them to measure year-on-year performance; this has the added advantage of creating accountability and demonstrating a tangible commitment to the diversity agenda to stakeholders. A well-executed board policy will ensure that diversity in its broadest sense remains a central pillar in every boardroom.
We urge companies to hold themselves accountable. How? By publishing comparable information on the diversity of their boards and senior management, either in the annual report or on the company website. This would provide improved data for companies and various stakeholders to measure ongoing progress in these areas and would inform shareholder engagement and investment decisions, resulting in enhanced market integrity. As we have described above, this is also likely to be a baseline investor and regulatory expectation in the future.
Further, there are a number of campaigns to which companies can become signatories; these include the Race at Work Charter and the Change the Race Ratio campaign.
3. Tone from the Top
Executive Sponsors for race provide visible leadership on race and ethnicity in their organisations. This is all part of creating transparency and accountability, as discussed above, in delivering on greater diversity and inclusion. They drive actions such as setting targets for ethnically diverse representation, briefing recruitment agencies, and supporting mentorship and sponsorship.
Nomination Committees should also be looking at succession planning pathways on at least an annual basis, and diversity and inclusion considerations, including ethnic diversity, should be at the heart of these discussions. Further, we see a growing number of companies constituting ESG Committees, which can dedicate further time on the Board’s behalf to focusing on internal people issues, including diversity and inclusion within the company.
4. Disregard ‘fit’ and focus on helping individuals thrive
The idea of being the ‘right fit’ can do more harm than good as it can unintentionally exclude otherwise well-qualified individuals.
Companies should instead look to support and celebrate what makes each employee different. This can also be done by actively soliciting feedback from employees to establish whether as ethnic minorities, they feel their differences are noticed and do they feel supported, focusing on helping individuals thrive and finally, ultimately ensuring HR's role in diversity and inclusion is defined and proactive in promoting ethnic diversity.
Talking about differences, especially regarding race, can be a sensitive topic. However, encouraging and confidently speaking about these issues can contribute to the progression of the company. Companies can celebrate employee differences by, for example:
· Creating an annual calendar of diversity and inclusion events, including celebrating Black History Month and other festivities such as Chinese New Year and Diwali; and
· Installing dedicated prayer and meditation rooms. Religion is a large part of many employees’ identities. Having a prayer or meditation room allows employees to maintain their professional lives without compromising their personal lives.
5. Add diversity to annual employee survey
Higher retention rates, lower absenteeism, greater productivity, better customer service, and higher employee morale results from an organisation’s attention to employee feedback. The annual employee survey assesses whether employees' points of view correspond with those of the organisation or its senior management. Employee engagement surveys assess employees' dedication, motivation, sense of purpose, frustrations, threats, values and enthusiasm for their jobs and organisations.
Adding a focus on diversity in annual employee surveys will open dialogue, gather views and demonstrate clearly intent in prioritising ethnic diversity issues. Here are some examples of questions that can be asked of employees:
1. Do you believe everyone has an equal opportunity to succeed in this organisation?
2. Do you trust this organisation to be fair to all employees?
3. If you raised a discrimination concern, are you confident your employer would do what is right?
4. Are there leaders in your organisation with whom you can relate?
5. Do you believe that the senior leadership is prepared to effectively manage a culturally diverse workforce?
6. The people I work with treat each other with respect. If you cannot agree with this statement, please elaborate?
7. Do you believe that workforce diversity is valued in your organisation?
Conclusion
Based on progress made to date amongst many companies, it seems fair to suggest that promoting ethnic diversity has at best been an after-thought, with many companies only referencing ethnic diversity as an addendum within their diversity policies and diversity disclosures.
While activists and recent events have spurred companies to react, we feel that this Black History Month is an excellent time to remind organisations that is it necessary to delve deeper than tick-boxing and tokenising diversity and offer some practical suggestions to improve the diversity culture throughout your organisation. Boards that understand the importance of diverse inclusion and representation across all levels of the company enjoy and add a wealth of long-term value for all stakeholders.
Get in contact
Should you wish to discuss any aspect of this article with us, including possible ways in which we can work with your organisation on corporate governance or compliance issues, please contact us at co-sec@oneadvisory.london
We would be delighted to hear from you.
[1] Boardroom Inertia report: ‘A spotlight on the diversity of FTSE Small Cap and AIM listed company Boards’, Company Matters (2021)
[2] ‘Covid-19 Is Rewriting the Rules of Corporate Governance’, Harvard Business Review Digital Articles, pp. 2–11. Paine, L. S. (2020)