Diversity in Company Leadership — Moving from Guidance to Regulation

Praesta Coach Steven Parker considers the shift in UK board governance to affect more diverse & inclusive leadership

Background
There is a growing concern, expressed by the public, investors and regulators alike that ‘large companies have become disconnected from society’ (Financial Reporting Council (FRC)) and that businesses need to urgently address their contribution to and wider role in society.

Almost every day we see or hear something in the UK news about companies and their failure to reflect our diverse world — boards or executive teams that still have a large majority of men; a distinct pay gap for women, as well as for minorities; corporate cultures that fail to support the differing needs of working parents or a young work-force.

Change is happening, but slowly, seemingly bogged down in corporate inertia and vested interests.

We look at how regulators have moved from guidance and principles to increasing regulation and prescription to try and force wider diversity in companies. If the pace of change does not accelerate, however, will legally binding quotas be the only way to finally resolve this tangible lack of progress?

Pressure Through Guidance and ‘Name and Shame’
There has been increasing pressure, in particular, to correct the under-representation of women in company leadership. Public reviews such as the Davies Review (2010) and the Hampton-Alexander Review (2016) have been used to highlight the issue and set guidance. Targets have been proposed — currently 33%, for the representation of women on boards, and guidance has been provided on how to tackle root causes in candidate selection, promotion and the overall culture surrounding women in companies.

To push companies further and accelerate change, ‘nudge theory’ is being applied, for example, by naming and shaming, through the annual public sharing of data on the proportion of women in boards and leadership teams and, recently, through the Equalities and Human Rights Commission regulations forcing companies to report their gender pay gaps.

Transparency should lead to change, so the theory goes. Everyone agrees change is happening, but slowly — far too slowly, for many.

Increasing Regulation to Accelerate Change
As a result, UK board governance, based on principles and guidance, is being strengthened to not only reflect the results of these initiatives but also to further push companies to demonstrate how they are implementing diversity and inclusion. The new UK Corporate Governance Code (FRC), which came into effect in January 2019, significantly increases the accountability of listed company boards in promoting a diversity and inclusion agenda.

The question that hangs over this trend though is whether companies will quickly accept and follow the Code and its underlying implications or whether government will lose patience and regulation will simply be imposed, as companies lack sufficient will and execution lags?

Diversity Aspects of the New Corporate Governance Code
The new Code prompts companies to embed diversity into the company’s human resources management, in a number of ways. For the board itself, the Code has core Principles around ‘(Board) Composition, Succession and Evaluation’ which state that:

• ‘Both (board) appointments and succession plans … should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths’ (Principle J).
• ‘Annual evaluation of the board should consider its … diversity’ (Principle L).

There is also increased emphasis on enforcing board rotation, particularly for the tenure of the chair, (3.19) in another attempt to accelerate implementation of diversity at the board level.

The remits of the board Remuneration and Nomination committees are also now significantly broadened to cover diversity and inclusion and they are required to be much more pro-active:

• The scope of the Remuneration committee now covers the whole company — not just remuneration policy and setting for the board and executive management, but also for ‘senior management’, as well as a review of overall full-time ‘workforce’ remuneration. The Committee is also encouraged to address any gender pay gap.
• For the Nomination committee, it becomes a critical element — ‘The annual report should describe the work of the nomination committee, including: … the policy on diversity and inclusion, its objectives and linkages to company strategy, how it has been implemented and progress on achieving the objectives and … the gender balance of those in senior management and their direct reports’ (3.23).

Increased Emphasis on Culture
Research shows that by far the best way to develop diversity is through a culture of inclusion and ‘belonging’. The new Code covers how the Board needs to ‘establish the company’s purpose, values and strategy … lead by example and promote the desired culture’ (Principle B) as well as ‘assess and monitor the culture’ (1.2). The challenge to any board, here, is to ensure that the executive and organisation are operationalising whatever cultural tone and goals are set at the top of the organisation.

The FRC carried out a major review on company culture and how it is developed and implemented through its #culture coalition (2016) research. It found that culture is difficult to define but is a combination of ‘values, attitudes and behaviours’ that is tailored to a specific company and its environment and which the organisation follows through in all its operations and all its stakeholder relations. It is very difficult to legislate for this.

The latest research from places such as Harvard and London Business School, has found that, in particular, a learning culture and ‘growth mindset’, where every employee is seen to have something to contribute and where difference is treasured, seems to be the very best way to create ‘belonging’ and inclusion. Microsoft is the ‘poster child’ for this new thinking (‘How Microsoft uses a Growth Mindset to Develop Leaders’ — Harvard Business Review)

Many companies talk of purpose and how they implement culture through their ‘purpose.’ However, recent Business in the Community (BITC) research — through its ‘Responsible Business Tracker®’ found that although 86% of companies had a purpose statement, 83% had not yet thought about how to implement it.

As ever then, in all this fine thinking around culture and purpose, it all comes down to will power and, specifically, how to execute and implement.

Quotas Next?
Since the financial crisis and with complex societal issues, the public, workers, government and regulators all now want to see companies exercise their responsibilities, including in areas such as equality, diversity and inclusion.

The UK approach around governance has traditionally been to set guidance and provide principles and expect business to follow — comply or explain. There has not been a pattern of heavy, prescriptive regulation, as in the US, for example. Hampton-Alexander and the FRC have followed this philosophy. Increasingly, to accelerate action, it is being backed by ‘name and shame’ tactics with forced transparency around data and numbers.

The question now though is whether this is fast enough to create the required change? The most notable change of emphasis in the recent UK Corporate Governance Code is that there is more prescription — around how and what. If companies do not and are not seen to be pursuing diversity and inclusion rapidly enough, we can expect more along these lines. This may happen, in any event, when, as expected, corporate governance passes to a new recommended Audit, Reporting and Governance Authority (ARGA). The word ‘authority’ sums up the new approach.

And, then, there is increasing discussion on whether gender quotas should simply be forced on companies.

So, boards and companies have a choice — accelerate their cultural, strategic and operational embrace of diversity and inclusion or … wait to be forced and told. The Chairman of Marks & Spencer pithily expressed the need for action, in the original Hampton-Alexander review — ‘It is right for business to reflect the world in which we operate and so we should just get on and do it.’