Diversity and Inclusion is high on the corporate agenda but is a challenge for society at large

We all recognise and are used to the raft of comment, regulatory guidance and best practice principles which surround ESG. It’s hard to deny the importance of the need to take care of the environment, be mindful of the effects of business activity on society and to operate as businesses within a sound governance framework. Nor can it be denied that modern society, particularly in the developed world, is multi-cultural.

Companies need to stay in touch with the needs of their customers and communities in order to generate consistent returns for their investors. Those companies which recognise the value of bringing a range of different perspectives to bear on their decision-making processes and take an inclusive approach to harnessing the thoughts and contributions of a workforce which is representative of their customers and communities, are likely to prosper. The current focus of attention on diversity and inclusion (D&I) is, therefore, directly relevant to commercial success in a multi-cultural society.

How are companies doing? Data produced by the Parker Review, set up to look into Board ethnicity in the FTSE 100, indicate that, by March this year, 81 companies had appointed at least one director from an ethnic minority. It was noted, however, that progress, is slower in key “functional” Board roles, suggesting, perhaps, that those 81 appointments are principally non-executive directors.

It has also been noted, by the organisation, Company Matters, that the FTSE 100 represents only a fraction of UK companies. According to their research, only 3% of AIM UK 50 directors and 5% of FTSE Small Cap directors represent an ethnic minority.

Last month, the Hampton-Alexander Review, on improving gender balance on UK company Boards, reported that more than one-third of FTSE 350 Board appointments are held by women and that there were no all-male Boards in the FTSE 350. However, the report does not distinguish between executive and non-executive directors. The statistics show that in 2020 almost 41% of FTSE 100 NEDs were female. However, between 2019 and 2021, the number of female executive directors increased from only 10.9% to 13.2%.

What conclusions can be drawn from this?

1. D&I is not just a Board issue: Things are only likely to change at an operational level if there is greater diversity of both executive and non-executive appointments. But directors tend not to have day-to-day contact with customers. D&I policy also needs to extend down through the organisation into the wider workforce.

2. D&I needs to be part of the management culture: This needs to be led from the top and embraced throughout the workforce as part of the company’s culture. Making a culture change may take some time to implement.

3. Having a D&I policy is not enough: Formulating a policy and embedding it in the management culture is important but actions are more important than words. Reporting outcomes, not intentions, sends a message that the company is fulfilling what it set out to do (and provides an opportunity to explain, if things have not gone according to plan).

4. The goal of greater D&I cannot be achieved by corporate action alone: Companies must be able to select from an appropriately skilled and experienced talent pool. Without the infrastructure to provide education and create opportunities, it may be too much to expect companies alone to be able to meet demands for greater diversity from within themselves. Greater D&I is on the corporate agenda but it is challenge facing society at large.

5. Nominations and remuneration committees have an important role to play: Management succession and remuneration policies should take into account a company’s D&I policy and goals. Working together, nominations and remuneration committees have a key role to play in identifying and attracting a diverse range of talent.

MM&K is part of the Global Governance and Executive Compensation Group (GECN) whose other member firms are based in the US, Switzerland, South Africa, Singapore and Australia. On 24 June, the GECN will be holding a webinar on the role of the remuneration committee in creating a diverse and inclusive culture. This virtual event will be hosted by the GECN’s Swiss member firm and will include contributions from a nominations and remuneration committee chair, an academic and GECN representatives from the US, South Africa and the UK. Details of this event will be available shortly.

To discuss any of the points raised in this article, please contact Paul Norris.

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