One by one: the case for ethnic diversity in the Boardroom

A high level overview of the Parker Review report, including recommendations based on the findings so far.

Between 2015 and 2020 one half of the world’s population will be concentrated in nine countries, five in Africa and three in Asia. So, increasingly Board diversity is coming under the spotlight. But, unlike other reports that have focussed on gender diversity, the latest report on this issue, “Beyond One by 21” (also known as the Parker Review), highlights the lack of ethnic minority representation in the Boardroom. The report uses the short hand “people of colour” but recognises that there is no perfect terminology that covers everyone with heritage from Africa, Asian, Middle Eastern and South American regions.

The report of the Parker Review published on 02 November 2016 is the findings of the review so far and will be the subject of consultation and debate with business leaders, regulators and lawmakers. As such, a final report, incorporating the output of this consultation, is due to be published at the end of February 2017.

The extent of the problem

The Parker Review found that UK citizens of colour represent only about 1.5% of the total FTSE 100 director population. This contrasts with 14% of the UK population. Equally disturbing is the fact that 53 out of the FTSE 100 companies do not have any directors of colour. But, rather than focussing solely on the problem, the Parker Review provides some pragmatic solutions that all companies (and not just those of the FTSE 100 or FTSE 250) should be considering.

Within the FTSE 100, 8% of directors are people of colour, compared to 14% of the UK population. This statistic, though, is skewed by the fact that seven companies account for over 40% of the directors of colour and five of these seven companies are headquartered outside the UK. Looking at UK citizens only, only 1.5% of the total director population are people of colour. This figure arguably better represents the extent of the issue. Equally significant is the fact that only four Chief Executives of colour in the FTSE 100.

The report deals head on with the issue of whether there are enough capable and qualified candidates of colour, noting other reports published in 2016 which highlight hundreds of high-calibre candidates from minority ethnic backgrounds. It therefore seems that there is little justification for companies not being able to identify suitable candidates of colour.

Our view

The Parker Report is very welcome.

Can you prove though that diverse businesses are always more successful? In a sense it is the wrong question, just as asking "are businesses more successful, the more diverse they are?" There is no scientific answer to either question. But if you ask questions like: "should a business reflect the values and priorities of its customers?" or better "how can business expect to succeed if they don’t reflect the current population, the proportion of people of colour and future changes in population?" then you address the business value of diversity, in particular ethnic diversity. It doesn’t have to be just about business value: it can be, as it is for us and others, a point of principle. And, it doesn’t have to be just about the FTSE 100, or even just the FTSE 250. It applies generally to listed and unlisted companies, the public sector and third sector. It applies equally to professional service firms.

Perhaps now is the time for the legal profession to adopt its own target representation of people of colour on the partnership boards of larger law firms?

One by 2021 sounds good to us.

Diversity

The Parker Review highlights the importance of diversity in its wider sense. Up until now, efforts around diversity have very much focussed on gender, but the business case for diversity is strengthened by considering diversity in its broadest sense. The report notes that, although the Parker Review’s remit is ethnic diversity, the leadership of UK companies needs to be more inclusive and more open in the future.

The business case for diversity

The FTSE 100 derives more than 75% of its sales from outside the UK. For the FTSE 250, this figure is over 50%. In order to understand better the commercial and cultural factors that affect organisations operating transnationally and internationally, companies need diversity of thought and experience on their boards. The Parker Review notes that directors of colour are likely to help with this because they are likely to have a different perspective on the issues, challenges and opportunities faced by their organisations. As demonstrated by the statistics above, this perspective has been, and unfortunately continues to be, lacking in FTSE 100 and FTSE 250 companies.

And, with a greater focus on issues such as corporate social responsibility and ethical business practices, consumers and investors seem, according to the report, to be more concerned about ensuring that the business that they engage with reflect their values and priorities. Companies that ignore diversity issues risk alienating themselves from these potential business opportunities.

Finally, the Parker Review suggests that organisations that have a reputation for valuing difference and diversity are more likely to attract talented employees. Therefore valuing diversity will help enable organisations to attract and retain the widest possible talent pool.

The legal backdrop

Positive discrimination is unlawful under the Equality Act 2010 so it is not possible for companies to recruit solely on the basis of ethnicity or any other protected characteristic. However, under the Equality Act where there are two or more candidates who are equally qualified and one of these is from an under-represented group (where this group shares a protected characteristic), the employer can elect to appoint the candidate from the under-represented group. The difficulty with this provision is that there is often uncertainty around whether candidates are equally qualified, which is likely to be, in part, a reason why it is relatively under-utilised.

As well as the issues of positive discrimination, companies need to be aware of the risks of indirect discrimination. The greatest risk of this arises at the point at which an organisation is determining what the requirements are for any particular board position All organisations should encourage those making decisions in relation to recruitment to carefully consider why specific experience or qualifications are actually required in order to carry out that particular role. A requirement for previous FTSE board experience should be carefully considered - this is likely to disadvantage candidates from those groups that are under-represented on company boards, particularly those belong to an ethnic minority group and could be susceptible to challenge.

Recommendations

Rather than just focussing on the problem of the lack of ethnic diversity on boards, the Parker Review sets out some pragmatic solutions to this issue. These can be divided broadly into three groups:

  1. increasing the ethnic diversity of UK boards
  2. developing candidates for the pipeline and planning for succession, and
  3. enhancing transparency and disclosure.
Increasing the ethnic diversity of UK boards

The report makes three recommendations about this:

  • 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 all FTSE 100 and FTSE 250 companies should require their human resources teams or search firms to identify and present qualified people of colour to be considered for Board appointment when vacancies occur.
  • Relevant principles from the “Standard Voluntary Code of Conduct” for executive search firms (which was developed in the context of gender-based recruitment) should be extended on a similar basis to apply to the recruitment of minority ethnic candidates as Board directors of FTSE 100 and FTSE 250 companies.
Developing candidates for the pipeline and plan for succession

Whilst, in relation to ethnic diversity, there are already plenty of high calibre candidates who would be suitable for board-level positions, the report says diversity still needs to be embedded in corporate succession plans. There are three recommendations for increasing the pipeline and planning for succession:

Members of the FTSE 100 and FTSE 250 should develop mechanisms to identify, develop and promote people of colour within their organisations in order to ensure over time that there is a pipeline of Board capable candidates and their managerial and executive ranks appropriately reflect the importance of diversity to their organisation.

Existing Board directors of the FTSE 100 and FTSE 250 should mentor and/or sponsor people of colour within their own companies to ensure their readiness to assume senior managerial or executive positions internally or non-executive Board positions externally.

Companies should encourage and support candidates drawn from diverse backgrounds, including people of colour to take on Board roles internally where appropriate, as well as Board and trustee roles with external organisations.

Enhancing transparency and disclosure

One of the focusses of the Gadhia report (Women in Finance), published earlier this year on gender diversity within financial services, was on setting measureable targets that organisations would be required to report against. The Parker Review recommends a similar approach in respect of diversity. Its recommendations are:

  • A description of the Board’s policy on diversity should be set out in a company’s annual report and should include a description of the company’s efforts to increase, among other things, ethnic diversity within its organisation, including at Board level.
  • Companies that do not meet Board composition recommendations by the relevant date should disclose in their annual report why they have not been able to achieve compliance.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.