Strong evidence confirms diverse boards perform better

There is now ‘significant evidence’ that diversity, over time, improves the performance of boards and the companies they lead, according to a new study.

Thanks to the Hampton Alexander review and more recently the Parker review, there has been a step change over the past decade with UK Listed company boards becoming more diverse than ever before. The Board Diversity and Effectiveness in FT350 Companies report found that efforts to diversify boards results in better corporate culture and performance. 

To maximise these benefits, however, business leaders and boards must recognise that change takes time diversity without active inclusion is unlikely to encourage new talent to the board. The report, published by the UK’s Financial Reporting Council (FRC) in conjunction with London Business School, Leadership Institute and SQW, concluded that many board members have largely committed to diversity; and boards have made efforts to change with some success, especially in relation to gender diversity. However, boards still have a very long way to go to fully access talent and reflect the UK population. 

BOARD DIVERSITY RESPONSIBILITY 

The main findings of the research concluded that:

• It is the responsibility of the Chair of a board to drive inclusion.
• Regulators and companies must focus on collecting more data on the types of diversity, board dynamics and social inclusion.
• The Nomination Committee itself should be diverse; and have a clear mandate to work with search firms that access talent from wide and diverse pools.
• The greater representation of women in the boardroom is reshaping culture and dynamics; and benefiting businesses from a social justice, as well as a performance perspective.

ACTIVE INCLUSION CRITICAL

The report also revealed that diversity without ‘active’ inclusion in the form of welcoming boardroom interactions is unlikely to encourage directors who look ‘different’ from others around the table to step forward and contribute. The research illustrates that this is already happening to some extent; particularly where greater representation of women on boards is reshaping the culture and dynamics of the boardroom into something that is more collaborative. 

“Ultimately, it also appears to benefit the businesses that get it right, from both a social justice and a performance perspective, as we find significant evidence that diversity, over time, improves the performance of boards and the businesses they lead,” noted the study.

KEY RECOMMENDATIONS

In short, companies need to do more to diversify boards, highlighted the report. FRC recommends that boards:

• Rethink how they understand diversity; for example, they should stop seeing movement on diversity and inclusion efforts as either a binary or linear progression. 
• Understand that diversity is a long-term, multi-stranded journey; where progress in one area is not a guarantee of progress in another. 
• Recognise that building and maintaining diversity requires proactive planning, concrete actions and consistent prioritisation. 
• Place much greater emphasis on both self and board-level development, to be world class. 
• Understand how directors’ conduct or ways of working together are helping or hurting them in their efforts to become both more diverse and effective. 

SUPPORT FOR TARGETS

Commenting on the report findings, FRC’s CEO Sir Jon Thompson, stated: “The FRC wants to see companies which thrive in the long term and both benefit the economy, society and reflect its make-up. I want to see boards invest time and energy in making diverse appointments not to achieve a target; but because it will have a positive impact on their business. The UK Corporate Governance Code makes it clear that board appointments should promote diversity; and we want to see nominations committees reporting on progress.” 

Thompson said he was pleased that the research “supports the need for companies to set clear targets and report against them as a means to improving diversity”. “Many companies only set targets for gender and to a lesser degree ethnic diversity,” he pointed out.  “We support the proposal that nominations committees should be diverse and have a mandate to work with executive search firms that will find talent from diverse backgrounds.”

‘TOP TABLE’ DIVERSITY COMMITMENT

Board diversity should be a “priority for every organisation”, added Dr Randall S Peterson, Academic Director of London Business School Leadership Institute and Osman Anwar, Director of SQW.  “Successful boards care because they want to perform as a team in service of their organisation, and in service to the world.”

Diversity takes “many forms”, they explained. “The findings of the report remind us what is at stake: diversity is not just a numbers game with regards to who is on the board, how board members interact really matters. We hope this report will stimulate new thinking and action on how all groups can genuinely feel included and supported at the ‘top table’.”

Click here for a copy of the report.

We have to wait until at least 2074 before Fortune 500 board seats held by underrepresented groups and minorities reaches the ‘aspirational’ 40% diversity rate, confirmed another new report. Click here to read more.