The Next Stage in Boardroom Gender Diversity

November has been a busy month for the issue of boardroom diversity. Earlier, this month, the Parker Review on ethnic diversity in the boardroom was published (discussed here), and now the Hampton-Alexander Review have published its first report on FTSE Women Leaders.

The Hampton-Alexander Review succeeds the review led by Lord Davies that took place between 2011 and 2015. There can be no doubt that notable progress was made in that period. In 2011, women accounted for 12.5% of FTSE 100 directors, but this had risen to 26.1% by the end of 2015. In 2010, there were 21 FTSE 100 companies with no female directors at all, whereas today, there are no all-male boards in the FTSE 100. However, it is also acknowledged that the Davies Review was not an unqualified success:

  • The gains made in the FTSE 250 were less modest than in the FTSE 100. By the end of 2015, women accounted for 19.6% of FTSE 250 directors, and there was 15 companies in the FTSE 250 that did not have any female directors.
  • The most notable failure of the Davies Review was the poor increase in the number of female executive directors. In 2011, there were only 18 female directors in the FTSE 100 (accounting for 5.5% of the total number of directors). By 2015, this had only risen to 26 (9.6% of the total).

The Hampton-Alexander Review aims to combat these issues in two ways. First, whereas the Davies Review largely focused on FTSE 100 companies, the Hampton-Alexander Review focuses on FTSE 350 companies. The principal goal set by the Hampton-Alexander Review is that FTSE 350 companies should aim for a minimum of 33% female representation by the end of 2020. The Hampton-Alexander Review notes that, as of November 2016, the figure is stands at 23%.

Second, the Hampton-Alexander Review focuses much more strongly on the ‘executive pipeline challenge’ and all CEOs of FTSE 350 companies should take action to improve the under-representation of women on the Executive Committee and in the layer immediately below. Unfortunately, the Review then goes on to recommend that FTSE 100 companies should aim for a minimum of 33% women’s representation across their Executive Committee by 2020. It is disappointing that no goal has been set for FTSE 250 companies, but the Review does note that it did not obtain enough data to set a goal for FTSE 250 companies, and it hopes to acquire more data in 2017.

The Davies Review established a firm foundation, but much more work needs to be done. It is hoped that the recommendations of the Hampton-Alexander Review will improve female representation in those ares where progress was weak, In particular, if the benefits of boardroom diversity are to be realised, it is important that women are placed in positions of leadership, and not confined to relatively powerless non-executive director positions. FTSE 350 companies will undoubtedly commit to the Hampton-Alexander Review, but it is hoped that they commit to the spirit of the Review, and not just the letter.

Boardroom Diversity: Diversifying the Debate

Since the publication in 2011 of Lord Davies’s Women on Boards Report, boardroom diversity has been a prominent governance topic. However, the debate has focused almost exclusively on one type of boardroom diversity, namely gender diversity. This was not always the case. The 2003 Higgs Review on the effectiveness of non-executive directors stated that ‘it is the range of skills and attributes acquired through a diversity of experiences and backgrounds that combine to create a cohesive and effective board.’ In the same year, the overlooked Tyson Report stated that ‘[d]iversity in the backgrounds, skills, and experiences of NEDs enhances board effectiveness by bringing a wider range of perspectives and knowledge to bear on issues of company performance, strategy and risk.’ Both of these reports recognised that boardroom diversity is not just about gender, and that numerous forms of diversity should be encouraged. Despite this, as noted, the debate has almost exclusively focused on gender diversity. Indeed, this emphasis is evident from the UK Corporate Governance Code, which states that ‘[t]he 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.’ Although diversity in general is noted, the express reference to gender indicates that gender diversity is currently dominant.

In other words, the diversity debate has, itself, lacked diversity. Fortunately, a recent report has been published which seeks to broaden the debate by examining ethnic diversity in the boardroom. The Parker Review into the Ethnic Diversity of UK Boards was published in November 2016, and like Lord Davies’s 2011 report, it begins by setting out a bleak picture of diversity. Amongst the FTSE 100, UK citizen directors of colour only account for around 8% of total director population. Of the 1,087 directors holding board positions in the FTSE 100, only 90 are persons of colour. 53% of FTSE 100 companies do not have any directors of colour at all, and only 9 people of colour hold the position of chairman or CEO.

Like the Davies Reports, the Parker Review rejected the introduction of quotas, and instead proposed a series of recommendations, of which the principal ones are:

  • 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.
  • Nomination committees of FTSE 350 companies should require their human resources teams or search firms to identify and present qualified people of colour to be considered by the board when vacancies occur.
  • A description of the board’s policy on diversity should be set out in the company’s annual report. Companies that do not meet the board composition targets should explain in the annual report why they were not met.

It is hoped that the Parker Review gains the same level of traction and support that Lord Davies’s review garnered. Whilst Lord Davies’s review has not been entirely successful (namely the increase in female executive directors has been poor), it has improved the gender makeup of boards in a notable manner, and the goals set by Lord Davies were broadly met (notably the 25% by 2015 goal). Hopefully, the Parker Review can have a similar effect on UK boards in relation to ethnic diversity, and begin the process of widening the boardroom diversity debate.

Board diversity progress stagnates.

Today, Cranfield University’s School of Management published its 2016 FTSE Female Board Report. This report is the first published since the conclusion of Lord Davies’s Women on Boards review, and the new target of 33% female board participation in FTSE 350 companies by 2020 was established.

The report refers to a ‘relative stagnation of the pace of change since October 2015’ and this is reflected in the highlight statistics:

  • The report notes a slight decrease in the number of women on FTSE 100 boards, from 26.1% in October 2015 compared to 26% in June 2016. This is the first time that the figure has stagnated in this way since 2011. As regards FTSE 250 boards, female board representation has increased from 18% to 20.4%.
  • The percentage of female non-executives in FTSE 100 companies has stayed the same as was the case in October 2015, namely 31.4%. Amongst FTSE 250 companies, there has been a slight increase from 23% to 25.7%.
  • The percentage of female executives in FTSE 100 companies has increased marginally from 9.6% in October 2015 to 9.7% in June 2016. Amongst FTSE 250 companies, there has been a slight increase from 4.6% to 5.6%. The report noted that progress in recruiting female executives (the principal failure of the Davies Review) remained ‘very slow.’
  • As regards FTSE 100 companies, 61% have reached Lord Davies’s original target of 25% female board representation. Currently, only 19% have reached the new 33% target.
  • As regards FTSE 250 companies, 36% have reached Lord Davies’s original target of 25% female board representation. Currently, only 15.6% have reached the new 33% target.

In order to remain on track to hit the new 33% target by 2020, FTSE 350 companies should aim for 27% female board representation by the end of 2016. At the current pace of change, this target will not be met.

There was, however, some good news. A number of FTSE 100 companies are close to achieving gender-balanced boards, and five FTSE 250 companies actually have gender-balanced boards. Amongst the FTSE 250, the number of all-male boards fell from 23 to 15 (no FTSE 100 company has an all-male board).

Overall, however, the report does not make for encouraging reading. It is clear that progress in many areas has stagnated following the end of Lord Davies’s original five-year review. If the 33% target is to be met, the new review led by Sir Philip Hampton will need to look at how best to increase the pace of change, especially in relation to the recruitment of female executive directors. With the prospect of Brexit on the horizon, and the reduced likelihood of quotas being imposed, it is important that FTSE 350 companies do not become complacent and place the issue of board diversity on the backburner.

Featured image is taken from the cover of the FTSE Female Board Report 2016.