Archive for the ‘Diversity’ Category

On board culture and diversity

Corporate governance thinking and practice seems to evolve either as regulators respond to corporate failings or directors adopt the prevailing conventional wisdom.  A year or two ago, the call was for boards to recognize their responsibility for identifying their company’s risk profile, assessing long-term risk, and ensuring appropriate risk  strategies and policies were in place and working appropriately.   Cadbury and the other early corporate governance codes had nothing to say about risk: now it has become a central issue.

Today, the conventional wisdom is focusing on board culture and board diversity.  But commentators seem unable to agree on what is actually meant by culture or diversity.  The time has come for some clearer thinking.

In March this year, I wrote in this blog that culture ‘can be thought of as the beliefs, expectations, and values that people share.  Like the skins of an onion, culture has many layers – national cultures, regional cultures, the culture of a company, and the culture in a board room.’  Much of the recent commentary about culture in corporate governance has focused on board level culture and its reflection on the culture of the company. so that it permeates activity at every level and in every sphere.

In its February 2017 report on corporate governance reform[1], the UK Department for Business, Energy and Industrial Strategy identified culture as ‘the central tenet of good corporate governance (which) should be embedded in the culture of all companies, so that it permeates activity at every level and in every sphere.’  Now what does that actually mean?  What do directors need to do to make it operational?

Board level culture depends on the experience, beliefs and expectations of those involved and, in particular on the leadership of the bard chairman and any other dominant personalities on the board.

Composition of boards

Companies should recruit executive and non-executive directors from the widest possible base.

The Report supports the recommendations of recent reviews on gender and ethnic diversity but recommends further measures ‘to ensure that diversity is promoted at all stages of careers to broaden the pool of talent at the executive level. To this end, the Government should set a target that from May 2020 at least half of all new appointments to senior and executive management level positions in the FTSE350 and all listed companies should be women.’ Overall, the Report’s recommendations are aimed at permanently ingraining ‘the values and behaviours of excellent corporate governance into the culture of British business.’

 

[1] For more information see the most recent blog from Professor Chris Mallin on this website.

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Ethnic Diversity on UK Boards

There has been much emphasis on the importance and value of board diversity. However the focus has generally tended to be on gender diversity, for example, in the UK the Davies Report (2011) recommended that representation of women on FTSE 100 boards be increased to at least 25% by 2015. By 2015 this 25% target had been exceeded with FTSE 100 boards having 26.1% of women on the board.

Various corporate governance codes and guidelines have stated that firms should have a ‘balanced board’. In 2014, when updating the UK Corporate Governance Code, the Financial Reporting Council pointed out that constructive and challenging debate on the board can be encouraged ‘through having sufficient diversity on the board. This includes, but is not limited to, gender and race. Diverse board composition in these respects is not on its own a guarantee. Diversity is as much about differences of approach and experience, and it is very important in ensuring effective engagement with key stakeholders and in order to deliver the business strategy’.

‘A Report into the Ethnic Diversity of UK Boards: Beyond One by ’21’

Earlier this month The Parker Review Committee, chaired by Sir John Parker, issued ‘A Report into the Ethnic Diversity of UK Boards: Beyond One by ’21’.

Starting from the premise that UK boardrooms, including those of leading public companies, do not reflect the UK’s ethnic diversity nor the stakeholders that companies engage with (customers, employees, etc.), the Parker Report states that ‘ethnic minority representation in the Boardrooms across the FTSE 100 is disproportionately low, especially when looking at the number of UK citizen directors of colour’. For example, the Report highlights that of 1087 director positions in the FTSE 100, UK citizen directors of colour represent only about 1.5% of the total director population with 90 individual directors of colour (four hold two Board positions) whilst total directors of colour represent about 8% of the total (compared to 14% of the UK population). Some 53 FTSE 100 companies do not have any directors of colour. Seven companies account for over 40% of the directors of colour, interestingly five out of the seven companies have headquarters historically located outside the UK. In terms of the key board roles of Chair and CEO, only nine people of colour hold the position of Chair or CEO.

The Parker Report’s recommendations can be found at http://www.ey.com/Publication/vwLUAssets/A_Report_into_the_Ethnic_Diversity_of_UK_Boards/$FILE/Beyond%20One%20by%2021%20PDF%20Report.pdf and are as follows:

 

 

  1. Increase the Ethnic Diversity of UK Boards

1.1. Each FTSE 100 Board should have at least one director of colour by 2021; and each FTSE 250 Board should have at least one director of colour by 2024.

1.2. Nomination committees of all FTSE 100 and FTSE 250 companies should require their internal human resources teams or search firms (as applicable) to identify and present qualified people of colour to be considered for Board appointment when vacancies occur.

1.3. Given the impact of the ‘Standard Voluntary Code of Conduct’ for executive search firms in the context of gender-based recruitment, we recommend that the relevant principles of that code be extended on a similar basis to apply to the recruitment of minority ethnic candidates as Board directors of FTSE 100 and FTSE 250 companies.

  1. Develop Candidates for the Pipeline & Plan for Succession

2.1. Members of the FTSE 100 and FTSE 250 should develop mechanisms to identify, develop and promote people of colour within their organisations in order to ensure over time that there is a pipeline of Board capable candidates and their managerial and executive ranks appropriately reflect the importance of diversity to their organisation.

2.2. Led by Board Chairs, existing Board directors of the FTSE 100 and FTSE 250 should mentor and/or sponsor people of colour within their own companies to ensure their readiness to assume senior managerial or executive positions internally, or non-executive Board positions externally.

2.3. Companies should encourage and support candidates drawn from diverse backgrounds, including people of colour, to take on Board roles internally (e.g., subsidiaries) where appropriate, as well as Board and trustee roles with external organisations (e.g., educational trusts, charities and other not-for-profit roles). These opportunities will give experience and develop oversight, leadership and stewardship skills.

  1. Enhance Transparency & Disclosure

3.1. A description of the Board’s policy on diversity be set out in a company’s annual report, and this should include a description of the company’s efforts to increase, amongst other things, ethnic diversity within its organisation, including at Board level.

3.2. Companies that do not meet Board composition recommendations by the relevant date should disclose in their annual report why they have not been able to achieve compliance.

 

Chris Mallin

November 2016