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Board Diversity - a review of recent changes and current trends - Cian Blackwell, FCA

Sun, Oct 30, 2011


The debate on diversity of boards and board members has been reignited in the past year by several developments. In June 2010, the Financial Reporting Council (FRC) published the UK Corporate Governance Code, applying to FTSE 350 and Irish Stock Exchange main market companies. Two issues received the lion’s share of the media coverage at the time—the requirement for directors to be appointed for one-year periods, and the requirement that the “search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of diversity on the board, including gender[1]”.

Expanding on this requirement—but also reflecting the change of government in the UK—Lord Davies of Abersoch was commissioned in 2010 to conduct a review of gender diversity on boards of listed companies. The report of Lord Davies[2] and his board was published in February 2011 and contained 10 principle recommendations, including:

  • all FTSE 350 chairmen should disclose their targets for female representation on their board and should aim for a minimum of 25%; and
  • quoted companies should disclose the proportion of women on the board, the proportion in senior executive positions, and the proportion in the workforce as a whole.

The report also recommended that the FRC amend the UK Corporate Governance Code to require listed companies to establish a policy concerning boardroom diversity. Following a consultation process where the “vast majority” of responses were in favour of the proposed amendments[3], the FRC updated the Code to require all listed companies to include in a separate section of the annual report “a description of the board’s policy on diversity, including gender, any measureable objectives that it has set for implementing the policy and progress on achieving these objectives”. It also updated Principle B.6 to require the board evaluation process to consider “its diversity, including gender”.

The FRC has given listed companies a generous period of time to comply with the updated requirements—they are effective for financial years beginning on or after 1st October 2012, which for most companies means the year ended 31 December 2013, and thus we won’t see relevant disclosures until well in to 2014. This is intended to co-ordinate the updates with the schedule for other proposed updates to the Code, and avoid multiple smaller interim updates.

The FRC however, does encourage companies to implement change sooner than that, “strongly encourage[ing] all companies voluntarily to apply and report on the intended additions to the Code with immediate effect.”[4]

Despite this encouragement, change in gender balance on boards has been slow in both the UK and Ireland. The bi-annual “progress report”, monitoring implementation of the Davies recommendations,[5] has shown that:

  • only 33 FTSE 100 companies have heeded his recommendation to set themselves targets for the number of women they aim to have on their boards
  • since the review, women represent 22.5% of all new appointments to FTSE 100, some way short of the 33% recommended in the report.
  • The number of women now holding FTSE 100 board directorships has increased marginally, from 12.5% to 14.2%.

The rate of progress has been even slower in Ireland. Research by Grant Thornton[6] earlier this year, covering annual report disclosures from 2010, showed that women hold only 8% of board positions in companies listed on the main market of the Irish Stock Exchange, and that 43% of boards had no female representation at all. A survey by the Irish Times in October 2011[7], although covering a slightly smaller population, had consistent findings, indicating female representation of 7.5% on the boards of the top 25 companies on the ISE.

Despite this slow development, the FRC decided against specifying a minimum target for the percentage of female directors, stating that this would in essence be considered a quota. Their view was that there is a risk that by introducing quotas, boards would engage in a fruitless exercise of ‘finding’ female non-executives solely to satisfy targets, with no regard for the actual intention of the quota, i.e. to improve board effectiveness. Although quotas are used in several other European countries, including France, Spain and Norway, they seem to be unlikely in the foreseeable future in Ireland or the UK.

Some commentators go further in their criticism of quotas, suggesting that it would lead to ‘token’ female non-executives, and actually undermine the position of all women on boards, regardless of the rationale for their appointment. And at least one notable commentator—Lucy Kellaway, a non-executive director and Financial Times journalist—believes the gender diversity debate is misguided, noting that “the obsession with women on boards seems all wrong”.[8] She goes on to point out that “[w]hat matters are the women on the staff, and making sure that the good ones get to the top.” Whilst Kellaway’s dismissal of the gender diversity argument[9] seems to be at odds with the mainstream, it does highlight the need to broaden that debate, from the narrow topic of ‘gender diversity on boards’, to two much broader topics—that of gender diversity in companies as a whole, and general diversity of thought and experience on boards.

Whilst gender diversity in companies as a whole is more a matter of employment equality than specifically corporate governance, general diversity on boards does very much fall into the realm of governance. In the original wording of the UK Corporate Governance Code as issued in June 2010, the FRC phrases its board diversity requirement in terms of diversity as a whole—“due regard for the benefits of diversity on the board, including gender”— mentioning gender diversity, but being careful not to limit it to that.

Board diversity is a far-reaching concept. Arguably, the gender issue has received the most consideration due to its quantitative nature—compared with skills diversity or diversity of experience, gender balance is easy to measure, compare and analyse.

But the difficulty of measuring diversity as a whole shouldn’t stop boards from making the effort to do so. The objective of the relevant provisions in the Code is not exclusively to increase the number of women on boards, but to increase the overall effectiveness of boards—the number of women should be seen as a means to an end, not an end in its own right. A sufficiently diverse board will bring a variety of skill sets, backgrounds, perspectives and experiences, which can all positively impact on the quality of decision making. Diversity of thought will be the result and will provide for more constructive board meetings.

The 2010 UK Corporate Governance Code introduced more than just diversity requirements—it also strengthened the requirement for board evaluations, introducing a requirement for external evaluations at least every three years. It is increasingly recognised that a board evaluation, in order to be an effective process rather than a box-ticking compliance exercise, needs to assess board dynamics and the behavioural aspects of the board’s performance.

Although board dynamics can be even harder to quantify and assess than board diversity, the two tend to go hand in hand, and board evaluations—including those that boards are required to perform on themselves—will need to address diversity. In turn, the disclosure of board diversity and the evaluation process provides an opportunity for better-performing and more progress boards to demonstrate their good practice to shareholders.



[1] Financial Reporting Council, UK Corporate Governance Code, June 2010; Principle B.2 (available at http://www.frc.org.uk/corporate/ukcgcode.cfm)

[2] Lord Davies of Abersoch, Women on Boards, February 2011 (available at http://www.bis.gov.uk/news/topstories/2011/Feb/women-on-boards)

[3] Financial Reporting Council, Feedback Statement: Gender Diversity on Boards, October 2011 (available at http://www.frc.org.uk/press/pub2645.html)

[4] Financial Reporting Council, Feedback Statement: Gender Diversity on Boards, October 2011; page 8

[5] Cranfield School of Management, Women on Boards: 6 Month Monitoring Report, October 2011 (available at http://www.som.cranfield.ac.uk/som/dinamic-content/news/documents/wftse2011.pdf)

[6] Grant Thornton, Corporate Governance Review 2011 (available at http://www.grantthornton.ie/Publications/Corporate-Governance-Review-2011

[7] Laura Slattery, ‘You’re on the board of a firm. Let me guess...you’re a man?’, Irish Times, 21 October 2011 (available at http://www.irishtimes.com/newspaper/finance/2011/1021/1224306202853.html)

[8] Lucy Kellaway, ‘Female quotas would target the wrong women’, Financial Times, 27 February 2011 (available at www.ft.com/intl/cms/s/0/c970093c-412b-11e0-bf62-00144feabdc0.html)

[9] See also: ‘Everyone benefits from a beast in the boardroom’, Financial Times, 9 October 2011 (available at www.ft.com/intl/cms/s/0/3bdb9b68-f0cb-11e0-aec8-00144feab49a.html)

 

Cian Blackwell is Partner, Business Risk Services at Grant Thornton.

 

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