Diversity on boards

Back in early 2011, all the talk was about improving diversity at board level. So much so that the Government set a deadline of 2015 for the FTSE 100 to ensure they have at least 25% female board representation. As that deadline approaches, we look at how successful that drive has been and what the future holds for board diversity for all employers as the pressure to tackle diversity at both board and senior management level is likely to filter down to all companies across the UK.

The 25% target

Four years ago, when this target was set following pressure from the Liberal arm of the coalition for more action on diversity, just 12.5% of FTSE 100 directorships were held by women and nearly 50% of FTSE 250 companies had no female board representation whatsoever. Lord Davies (leading the independent review which led to these targets being set) predicted: “At the current rate of change it will take over 70 years to achieve gender-balanced boardrooms in the UK”.

The position has improved significantly in the intervening years. A report published last month by Cranfield School of Management revealed that women now account for 22.8% and 17.4% of board representation in FTSE 100 and FTSE 250 companies respectively. Just 24 more female appointments are needed to hit the target. As of May 2014, there are no FTSE 100 boards without female representation.

Lord Davies’ review has also led to legislative changes. Companies are now required to produce a strategic report which, for quoted companies, must include separate entries relating to the number of persons of each sex who are directors, senior managers and employees. The UK Corporate Governance Code, applying to companies with a premium listing, has also been amended to include a requirement that listed companies report annually on their board’s diversity policy, measurable objectives set to implement this policy, and progress on achieving the policy’s objectives.

The future of gender diversity

This appears to be a success story. And yet Vince Cable used the Liberal party conference in October to remind the FTSE 250 that it has a long way to go. Even if the 25% target is achieved, gender imbalance on boards is likely to remain on the political agenda throughout 2015 and beyond. BIS’ third annual report on women on boards, published in March 2014, makes clear that the 25% objective is merely a short-term goal and further targets will be set which are likely to include FTSE 350 companies scrutinising their gender diversity on boards and in senior management.

Furthermore, progress has been far from universal. The rate of female appointments in the FTSE 250 has dropped. FTSE 100 achievements are largely down to a rise in the number of female non-executive directors rather than executive board appointments. The number of female CEOs remains low: there are currently only 4 female CEOs in the FTSE 100 and 8 in the FTSE 250.

In light of this, the issue of mandatory fixed quotas (which have been implemented in many EU countries) for female board representation will continue to be touted as an alternative approach. BIS’ report warned that quotas could be introduced if self-regulation fails to meet Lord Davies’ objectives.

In November 2012 the European Parliament had voted in favour of the European Commission’s proposal to set a fixed quota of 40% female nonexecutive directors in publicly listed companies by 2020. However, this motion is currently being blocked at European Council level by a number of countries, including the UK, and in September 2014 a House of Lords committee urged the government to continue to resist EU plans.

The concept of fixed quotas in the UK has been met with differing reactions. Whilst some believe it will encourage companies to concentrate more on who to approach and how to advertise roles at board level, in terms of expanding the pool from which appointments are made, others are more sceptical, citing the dangers of promotions being perceived as based on numbers rather than on merit.

This of course assumes that there are not enough meritorious female candidates in the market which many would refute. Even looking at those countries where quotas have been used such as Norway, which has had in place a 40% female board representation quota since 2008, a recent study showed that there has been no narrowing of the wage gap or improvement in female representation in other leadership positions. Few would therefore object to the suggestion that change should be across senior leadership and not just in the boardroom.

There is also growing pressure on the UK to stop blocking EU mandatory quotas. Germany, who had been one of the UK’s staunchest supporters against quotas, legislated in November to require listed companies to have at least 30% of board seats occupied by women. Taking this into account, and unless there is real progress from self-regulation, it may be that time is running out for the UK and other countries to resist some kind of EU quota measure.

Diversity in practice

There will always be arguments for and against quotas and whether they actually are effective in what they are trying to achieve: genuine, progressive and beneficial (for the individual and the company) equality and opportunity. Employers should be reminded that under UK equality laws, every appointment must be on merit and not based on a “protected characteristic” such as sex. However, where there is a real disadvantage identified, such as lack of representation at a particular level in an organisation, there are some acts of positive discrimination which are permitted as long as such action is proportionate. Equality and

Human Rights Commission guidance has indicated that appropriate action could include measures such as:

  • Creating networking opportunities specifically for women
  • Providing women with mentoring and sponsorship programmes
  • Allowing women to shadow existing board members
  • Setting targets for increasing the amount of female representation on boards

In addition, employers can take action in “tie-break” scenarios: where two or more candidates are assessed to be of equal merit and where only one has a protected characteristic (such as gender), employers can choose to promote the candidate with the under-represented characteristic. Having said this, given the risks associated with any appointments based on “protected characteristics”, most organisations would understandably shy away from openly using this as a justification.

Beyond gender diversity

The government (as well as opposition parties) have begun to broaden their horizons when it comes to boardroom diversity. At the 2014 Liberal Democrat party conference, the Business Secretary Vince Cable announced his commitment to promoting ethnic minority board representation. Shortly, he is expected to launch a plan to have one in five bosses in British boardrooms come from black, Asian and other ethnic minority backgrounds within the next five years. As with gender diversity, this will represent a target, not a legally binding quota, and may be rolled out to include FTSE 250 businesses. The Labour party’s Chuka Umunna has made similar noises in recent speeches, whilst pressure groups are starting to look at the impact of age on diversity, particularly for women who have taken time out for children.

The year of change?

As 2015 approaches, and even if, as expected, the FTSE 100 25% target is achieved, it is unlikely that this will be considered enough progress for the government and equality groups. This is particularly so since BIS already made clear in its most recent annual report that the 25% target was only a short term goal and that further targets will be set. With so much uncertainty as to the make-up of the next government, it is difficult to predict precisely what further changes will be made. Whatever happens in the UK, it is likely that pressure from the EU and other interested parties will force all employers to consider more actively gender equality in leadership positions as well as at board level in future as the debate moves on from where it began in 2011. Yet with continued membership of the EU in some doubt, it is anyone’s guess what the future holds. We have no doubt that the debate will evolve to include ethnicity and age towards the end of the decade as politicians and pressure groups continue to insist that our nation’s boardrooms reflect the diversity of the UK itself.