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The next frontier – Developing diversity

Home / The next frontier – Developing diversity

18 December 2015
Uncategorised

Q3 2015

We have been engaging to increase diversity at companies at the board level and beyond and we are developing a diversity framework.

What is diversity?
As well as gender, diversity encompasses nationality, ethnicity, religion, cultural background, education, personality differences, experience and skill-sets. In our engagement with companies, we have called in particular for greater diversity on boards in order for their members to provide a different perspective necessary to challenge senior executives and non-executives as well as to counter groupthink and unconscious biases that might dominate decision-making.

Benefits
It is in companies’ interests to have greater diversity at the board but also at the executive and non-executive levels below. An increasing body of research1 shows that greater diversity leads to better performance of companies. McKinsey’s 2015 Diversity Matters study says that gender-diverse companies in the top quartile for diversity are 15% and ethnically diverse companies 35% more likely to financially outperform those in the bottom quartile. In the UK, for every 10% increase in gender diversity, earnings before interest and tax rose by 3.5%, according to the study.

Other research shows that different forms of diversity bring values, change corporate risk-taking behaviour and may even have an impact on likelihood of fraud. Groups that perform at a high level have a wealth of external perspectives, characteristics and approaches to problem-solving and manage the differences and potential conflicts of diversity well to reap its benefits. However, selection and promotion processes at most companies currently do not promote diversity – instead they continue to build homogenous teams.
Besides strategy and governance, diversity data at all levels helps a company understand its customer and product footprints. For example, a luxury goods company should have the necessary staff and executives’ composition to explore its high-growth markets. Furthermore, embracing diversity sends a signal to staff, investors and the public that the company takes a positive attitude towards differences in views and is committed to challenging the status quo. These issues are highly related to our engagement work on strategy, risk and governance at the board and senior executive levels.

Engagement
Often, diversity is too narrowly defined and some companies may pay lip service to it as a compliance issue without understanding how diversity initiatives could bring benefits to them. We therefore seek to engage with companies and discuss their strategy on how different dimensions of diversity are taken into account, so that diversity truly becomes a strategic response rather than a knee-jerk reaction to developing trends, expectations and opportunities.

Most of our work on diversity has focused on board composition with objectives relating to independence, countries of origin/international experience reflective of the footprint of the company and professional or industry experience. Moving beyond these initial criteria, we are also looking at how board membership factors in gender as this tends to force companies to look outside their traditional talent pool. Other background features, including education, are much more difficult to assess although prior existing ties such as university, past mutual jobs and other institutional ties often influence selection processes.2

Encouragingly, more companies are making an effort to increase diversity – including beyond the board. In a meeting with its head of diversity in the second quarter of this year, for example, we learned about some of the best practice and practical initiatives undertaken at Lloyds Banking Group to increase diversity among its 8,000 most senior managers. The dialogue was a follow-up to the CEO’s assertion in a previous meeting with us that Lloyds is targeting 40% of its senior staff being women on merit by 2020 – up from currently 29% – as the bank has recognised the waste of talent and the diversity of its customer base. In the meeting, we uncovered some groundbreaking work carried out by Lloyds in its approach to recruitment, consideration of working practice structures, mentoring and childcare as well as covering gender, ethnicity, age and sexual orientation. The initiative is carried out by a small dedicated team to ensure that diversity is the responsibility of everyone at Lloyds. It is overseen and promoted by the CEO and his executive team, each who have key performance indicator targets relating to diversity. Diversity also regularly features on the meeting agenda of the executive committee. We continue to monitor progress at Lloyds and plan to take its best practice on diversity below the board level to other companies.

Equal pay
With good progress being made on the representation of women on FTSE 100 boards, focus has turned to the low number of women chairs and the loss of talented, senior women from the executive pipeline. One contributing factor to this may be the pay gap between the genders whereby men get paid significantly more for the same role. The UK’s Chartered Management Institute found in a 2014 study that women only take home 77% of men’s earnings in full-time comparable jobs.

Large employers in Austria, Finland, Germany and Sweden are already legally required to report on their gender pay gap.

In 2015, the UK government proposed that UK companies should provide an overall gender pay gap figure that captures the difference between the average earnings of men and women as a percentage of men’s earnings.
We recently responded to this consultation, supporting the implementation of section 78 in the Equality Act 2010 – gender pay gap information – which the government has committed to introducing within the Small Business, Enterprise and Employment Act 2015.

We welcome this proposal, as we believe the publication of an overall gender pay gap figure is an important step forward. The published figure may not provide meaningful comparisons across sectors but will reflect different and specific circumstances for each organisation beyond a simple pay gap issue. Moreover, we believe that increased transparency on the matter is likely to propel companies into action. Companies could then provide additional information on a voluntary basis to explain their own specific circumstances. Overall, we feel this legislation has the potential to encourage companies to ask themselves the right questions regarding their general approach to diversity and human capital management.

In our engagement with companies, we address the quality of management and organisational issues, such as staff retention, to ensure equal opportunities. We find that companies that are implementing measures to improve equality to be more transparent and willing to share data on their progress, including survey results. We encourage the gender pay gap indicator to be made available to all stakeholders, including employees. For a public company, the indicator should be published in its annual report, to ensure regular monitoring as well as its visibility to management and accessibility to shareholders. A specific target for reducing the pay gap is helpful to ensure that action is taken before the divide widens further. Closing the gender pay gap would undoubtedly benefit society as a whole. A wide set of research indicates that rising levels of productivity and employment, which drive a healthy economy, are natural byproducts of a narrower gender pay gap. Companies that manage to narrow their gap benefit from lower turnover and a higher employee attraction and retention rate.

Diversity framework
We are developing a methodology that can be tailored to our engagement with companies in which our clients invest. We are taking a pragmatic approach to its design, which encompasses culture and regulation, sector, geographic footprint and the capital structure of a company, all of which can contribute to the unlocking of value and avoidance of risk.

We will continue to challenge companies that fail to tackle diversity issues and push them to meet the voluntary targets or quotas. We will also increase our focus on achieving greater diversity at the executive level.

  1. 1 Diversity Matters, McKinsey 2015 The Business Case for Equality and Diversity, UK Government 2015 Is Board Diversity Important for Firm Performance and Board Independence, Monetary Authority of Singapore 2012 Gender Diversity and Fraud, Cumming, Leung and Rui 2015 Diversity of Corporate Board Committees and Financial Performance, Carter et al 2004 The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies, Scott E Paige 2007 Women as Drivers of Japanese Firm Success, Nakagawa and Schreiber 2014 Corporate Governance, Board Diversity and Firm Value, Carter, Simkins and Simpson 2003
  2. 2 http://www.sonean.com/uploads/media/20744_SONEAN_Whitepaper_Feb_2015_en_ final_Web_01.pdf
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Setting the scene
The need for greater diversity in the management and leadership of companies and society has been a matter of increasing public concern. Much of the focus has been on gender diversity. In the UK in 2011, Lord Davies launched a campaign to increase the proportion of women on the boards of FTSE 100-listed companies to 25% by the end of 2015 – a target exceeded earlier this year. The 30% Club – of which we are a member – aims for 30% to be reached by the end of 2015, as 30% is deemed to be the pointat which critical mass is reached. Progress has also been made at companies outside the FTSE 100. Countries such as France, Italy, Spain and the Netherlands meanwhile have followed in the footsteps of early adopter Norway by introducing quotas for women on boards, ranging from 30–40%. Germany even requires 50% of the members of supervisory boards at large listed companies to be female by 2018. Furthermore Japan, which has traditionally been the laggard in relation to female recruitment and promotion, now targets 30% of women in management by 2020 and has passed a bill requiring companies with over 300 employees to set targets for benchmarks such as the percentage of female hires and managers and publish them starting in April 2016. We strongly support these developments. However, for the full benefits of diversity to be achieved, it needs to go beyond gender and the board.

Open, strategic questions to ask companies

on diversity

Open, strategic questions to ask companies on diversity

  • „„How do you define diversity?
  • „„Do you see the benefits of diversity, in terms of performance, innovation, staff management and commercial impact?
  • „„Are you satisfied with your current level of diversity?
  • „„How do you integrate diversity as a driver of performance in your organisation?

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