UK diversity rules a big step forward, but still a challenge

Diversity quotas for UK company boards have been hailed as a timely and positive step towards achieving equality in business, but experts say companies may not be genuine in their approach and the available talent pool may not be deep enough for them to meet the targets.

In late April, the UK’s Financial Conduct Authority published a new policy decision around diversity quota listing rules and reporting requirements for executive management and key board committees of listed companies.

The new targets require women to make up at least 40% of a company’s board, with at least one senior position, such as chair, chief executive, chief financial officer or senior director to also be female.

In addition to the gender diversity requirements, the rules require at least one board member to be from a non-white ethnic background.

If companies are not able to comply with the requirements, they must provide detailed explanations of why the targets haven’t been met, and what they are doing to achieve those targets in the future.

Listed companies will be required to make those disclosures in their annual reports for financial years starting on or after April 1, 2022.

The regulations are the culmination of a process that’s been under way for several years to address the inequality of the composition of company boards across the UK.

In 2017, investigations into the ethnic diversity of UK company boards, conducted by a steering committee led by Sir John Parker, called for all companies on the FTSE 100 to commit to ‘One by 21’, a slogan that prescribed a target of at least one director from a minority background by December 2021.

FTSE 250 boards were given until 2024 to achieve the same target.

Companies were also urged to provide details of its initiatives to increase ethnic diversity both at a board level and throughout the organisation in their annual reports.

Analysis by leadership consultants Spencer Stuart found that as of April 30, 61 of the FTSE 100 companies said they had met that target, with 18 reporting they had not.

A further 19 companies did not report their situation.

The 2021 UK Spencer Stuart Board Index showed 11% of board members across the UK’s 150 biggest listed companies identified as coming from an ethnic minority background, while 61% had at least one minority ethnic director on their board.

Following the Parker Review, in 2018 Great Britain’s Equality and Human Rights Commission (EHRC) published a comprehensive review on how the UK was performing on equality and human rights across education, work, living standards, health, justice and security and participation in society.

That review found significant progress had been made towards gender equality, with the employment gap and pay gap narrowing for women as compared with men, and the number of women represented on company boards had increased.

The more recent research by Spencer Stuart found that 67% of the UK’s largest 150 companies had at least 33 per cent of their board made up of women, with 68 of those companies in the FTSE 100, and 32 in the FTSE 250.

While the average size of UK company boards surveyed was 9.9 people, the research found women occupied 36% of board roles in the top 150 companies in 2021, a marked rise from the 12% recorded in 2012.

Kate Arnott, Head of Professional Services at MHA MacIntyre Hudson, part of the Baker Tilly International network, however, says while there has been significant improvement, there is still a long way to go to achieving true equality.

Ms Arnott says when the board positions are scrutinised, it is revealed that many of those women on boards are non-executive directors, throwing into question whether they are in true positions of leadership or not.

In 2021, Spencer Stuart found women accounted for more non-executive board positions than men, representing 51% of all non-executive directors.

But there are just 14 women who act as a company chair, accounting for just 9% of all chair roles.

In executive roles, there were 12 female chief executives at the UK’s 150 largest companies, a rise of only five over the last decade, while women represent 17% of all chief financial officers.

Spencer Stuart found that 64 of the top 150 companies listed on the FTSE had men in all four senior board positions (chair, CEO, SID or CFO).

Ms Arnott says while having diversity quotas is a fantastic step forward, the danger with having targets is that there can quite often be a lot of ‘gaming of the system’.

“It all depends on how honest companies are going to be and how transparent they are through this process,” Ms Arnott says.

“It would be quite easy to ‘tick a box’, if I’m being frank, but the issue really is to go further down the pipeline and solve the actual inequalities that are in place.

“While companies need to plan ahead and make sure they are ready, the onus of the statutory disclosures isn’t that burdensome and the data isn’t that complicated.

“But I think it will be substance over form, with companies actually putting the right things in place to make sure their leadership roles and their boards are more diverse in the future.”

The other danger with targets and quotas, Ms Arnott says, is that they could become an upper limit.

“You don’t want people’s mindsets to be ‘I’ve ticked the 40 per cent gender box and I’ve put one member from a non-white ethnic minority on the board, so I’m done’,” she says.

“There’s a danger then that’s a ceiling rather than a baseline. It’s useful to have targets but you don’t want to shut off once they’re achieved.

“It should be the right leadership team regardless of race, sexuality and gender, and it should be about giving them the right opportunities to get there.”

Ms Arnott urged companies to take a long-term approach to gender and ethnic diversity, with a danger that those that attempted to comply but didn’t get their strategies exactly right could be looked upon less favourably by investors, clients or customers.

“Businesses need to develop strategy, they need to look at their recruitment policies and they need to look at their mentoring and sponsorship policies,” she says.

“If they haven’t reached the quota, showing that they are putting things in place should negate the negativity of not meeting the quota.

“People would rather look at it and think ‘this business is taking this seriously and putting in long-term plans to address it’, rather than masking it with a quick fix.”

Amanda Trewhella, Managing Associate at UK based law firm Freeths, part of the Baker Tilly International network, says performance on diversity differed greatly across industries, with some achieving great results, and others still with a lot of work to do.

Ms Trewhella says there has been an obligation for employers with 250 or more employees to publish an annual report on their gender pay gap since April 2017, but there is no such requirement to measure the pay gap between ethnic backgrounds.

“It is something that has been discussed over recent years and some companies are choosing to do it voluntarily,” Ms Trewhella says.

“Although it doesn’t appear imminent, it is likely that in the future legislation may be brought in requiring companies to publish their ethnicity pay gap, so this is something that employers should also be bearing in mind in relation to their diversity and inclusion strategy.”

Ms Trewhella says in regard to the new gender and ethnic diversity targets prescribed by the FCA, the short timeframe for companies to comply would also provide significant challenges for business.  

“Improving diversity isn’t something that can be done overnight, so if we are looking at reports that need to be ready in a year’s time, if they haven’t reached those targets so far, they are probably not going to be much closer in a year’s time,” Ms Trewhella says.

“It’s really about planning and putting together a strategy as to how they can make improvements so that if in a year’s time they haven’t reached those targets, they have got an explanation of what they are going to do and the positive steps they are going to take to make those improvements.”

The other big challenge for business, according to MHA MacIntyre Hudson’s Ms Arnott, is that the pool of talent at a senior level is simply not deep enough for all companies to meet their targets.

Ms Arnott says while there may be an element of ‘headhunting’ that could help to push up wages for both women and ethnic minorities, some companies inevitably would miss out on talent.

“There might be a more competitive edge to the market, but the issue will still be that there is just simply not enough diverse talent in that senior leadership pool,” she says.

“That is a long-term fix, but at the moment the amount of talent required is just simply not there.”