Research & Strategy

By Eleonora Puglisi - Research and Strategy Consultant - 03 Oct 2018

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In September, we had the pleasure of attending the launch of the FRC’s board diversity reporting paper, in collaboration with the University of Exeter. The research had been carried out to shed some light into how, and to what extent, FTSE 350 companies currently report on diversity within the annual report, with the FTSE 100 leading the way in best practice.

With a number of extraordinary women on the discussion panel - including Baroness Margaret Prosser, former Deputy Chair of the Commission for Equality and Human Rights and Dame Helena Morrissey, Founder of the 30% Club - issues such as the gender pay gap, LGBT representation and ethnicity were addressed. The panel emphasised the importance of ensuring companies have a corporate culture focused on inclusion, demonstrated through diversity-enhancing policies, such as helping women get back to work after maternity leave and providing flexible working arrangements.

With regards to women on the board, the research showed that there has been an increase, with women now making up almost 28% of the FTSE 100 boardroom, demonstrating strong progress towards the Hampton-Alexander set target of 33% by 2020. In the same year, however, women only made up 19% of the executive team in the FTSE 100.

Reporting still needs work

The panel pointed out that although companies are starting to take diversity seriously, with internal initiatives, policies and practices, they are still failing to successfully convey these in their annual report, which often results in investors questioning their commitment to such matters. On the back of the Hampton-Alexander review (gender diversity) and the Parker review (ethnic diversity), a number of companies have started to lead the way by acknowledging these matters in their annual reports.

Board diversity policy

The research showed that whilst most of the FTSE 100 have a clear boardroom diversity policy, only 83% of companies address gender and 33% address ethnicity specifically. The FTSE 250 falls even further behind, with 74% of companies reporting on gender and 30% on ethnicity.

How should companies report on board diversity?

Companies should consider providing a statement which addresses why they consider diversity to be beneficial to the board, for example, to reduce the occurrence of learned group thinking and to challenge views which helps to drive high performance and innovation. Softcat and Aviva are two examples of companies that have taken a decisive step towards clearly acknowledging the Hampton-Alexander gender target in their annual report.

The importance of diversity in succession planning

It is paramount that the board and the senior management team are comprised of the right people to drive the business towards success. The research showed that the number of companies that acknowledge the importance of having specific procedures in place with regards to diversity in senior management succession planning is low. In terms of board succession planning, only 16% of the FTSE 100 and 9% of the FTSE 250 address gender and only 9% of the FTSE 100 and 3% of the FTSE 250 report on ethnicity.

How should companies report?

Going forward, there is a strong belief that companies will begin to acknowledge the importance of diversity in board and senior management succession planning. This trend is also supported by the McKinsey report on diversity, which has found that “companies in the top-quartile for gender diversity on their executive teams were 21% more likely to have above-average profitability than companies in the fourth quartile, and for ethnic and cultural diversity, top-quartile companies were 33% more likely to outperform on profitability”.

A way to demonstrate a company’s commitment to diversity in succession planning is by including information on the initiatives in place to increase the proportion of women and ethnic minority employees at senior management level, such as through mentoring schemes. For instance, Lloyds sets an extraordinary example of committing to increase the proportion of senior roles held by black, Asian and ethnic minority colleagues to 8% by 2020.

Board evaluation and diversity

There is still a lot of work that companies need to do with regards to addressing board diversity in board evaluation. The research demonstrated that 79% and 83% of the FTSE 100 and FTSE 250 companies, respectively, did not mention diversity with regards to skills and experiences, as well as gender and ethnicity, in their annual board evaluation. On top of that, out of the 21% of FTSE 100 companies that reported on diversity, only 10% specified gender and 2% specified ethnicity.

How to report on this?

A way to further demonstrate how companies take this matter into consideration is to set specific objectives, such as ensuring diversity principles are fully incorporated into recruitment processes.

Accountability in increasing diversity

Yes, diversity is important and should be integrated at every level of the organisation, but who should oversee that this matter is on everyone’s agenda?

The research concluded that only 9% of FTSE 100 companies and 6% of FTSE 250 companies specify a person or a role held accountable for the success of any initiatives or objectives set.

How to report on this?

Whilst some companies have designated roles, others have taken a more holistic approach to this matter by residing this responsibility to the chief risk officer, demonstrating the strategic importance of diversity and how it plays a crucial role in the company’s operational progress.

The annual report should clearly state who is responsible for driving this issue forward, which could be done in the sustainability section of the report, as well as the risk section when addressing culture as a key risk.

If you would like to learn how you can improve your corporate and investor communications to clearly demonstrate your company’s commitment to diversity, please contact rochelle.ohagan@design-portfolio.co.uk.