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10 reflections on boosting board ethnic diversity

23 October 2017 by Jimmy Nicholls

10 reflections on boosting board ethnic diversity - Read more

The latest iteration of the Parker review responds to recent events, recognises requests to broaden its purview, and warns its advice may become obligatory

Almost a year after publishing a first draft for consultation, the Parker review has put out its final verdict on the state of ethnic diversity on the boards of the UK’s biggest companies.

A government-backed initiative, the review flagged the comparative lack of ethnic diversity of UK boards compared to the population and advocated that boards have more than one member from a black and minority ethnic background by 2021.

Although its recommendations remain intact, the final report acknowledges the feedback received during the consultation period.

As the report puts it: ‘As a general matter, the feedback on the consultation version was overwhelmingly positive, with many stakeholders offering constructive suggestions to make the recommendations more impactful.’

Here are the some of the important developments in the report:

1. Mandatory threat

In line with the ‘comply or explain’ principle of the UK Corporate Governance Code, Sir John Parker’s recommendations are proposed as voluntary for FTSE 350 companies.

Commenters backed this aspect of the proposals. However, the report states that should ‘insufficient progress’ be made the report’s steering committee could ask for the recommendations to be made mandatory.

2. Broader application

Although the report focused on listed UK companies, commenters believed that the recommendations should apply to all firms ‘since diversity is of fundamental importance for all’.

Also targeted were charities and public bodies, which commenters felt should be taking a lead on diversity and inclusion, especially as a means of preparing staff to move to the private sector.

3. Investor role

Investors are taking an interest in companies’ approach to diversity and inclusion as part of their broader strategy.

As the report said: ‘Commentators felt it was important to note that investors are increasingly seeking to align themselves with companies that reflect their beliefs, values and priorities.’

The submissions argued that shareholders could pressure boards to take action on this issue, including by approaching chairmen, non-executive directors and senior executives.

4. Targeting controversy

Diversity targets and quotas have long proved touchy, but Parker’s were ‘widely supported and endorsed’ by commenters, according to the report.

However, ‘there were some commentators that expressed a view that the targets were not stretching enough and/or that having a date for achievement was not helpful’, the report said.

‘In particular, one commentator felt that companies should set their own strategy in this regard depending on what was realistic for them and their starting point.’

5. Nomination committees

Submissions to the review argued that the Financial Reporting Council (FRC) should clarify the role that nomination committees have in improving inclusion and increasing diversity on boards.

In a similar vein, the FRC was asked to clarify the relevant disclosure requirements in corporate annual reports.

6. Executive pipelines

Citing executive search firms’ role in changing boards’ gender balance, the submissions argued that a similar approach would work for ethnic diversity.

It was felt that companies need to develop pipelines to this end, although it is seen as ‘an on-going challenge by many, and development of a broad and deep pool of suitable candidates will take time’.

Search firms will also face ‘additional considerations under the Data Protection Act 1998 and Equality Act 2010 that must be managed’. These issues could be clarified by guidance from UK authorities, the report said. 

7. Mentorship

Leadership and mentoring has often been identified as a key factor in driving diversity.

Review commenters supported mentoring and sponsorship for ethnic minority senior leaders, including by the chairman and non-executive directors. Many also felt diversity should be pursued by all employees of whatever level.

Some also argued for unconscious bias training, the promotion of ethnic minority role models  and reverse mentoring.

8. Monitoring

The core of responses took the view that – as the old phrase puts it – ‘what gets monitored gets done’, when it comes to diversity.

‘However, there was not a uniform view about whether such reporting should be mandatory or voluntary, although a number believed that it should be mandatory,’ the report said.

Commenters also emphasised that a link must be made in corporate reports between diversity, strategy, and practical action, to stop such reporting being perfunctory.

9. McGregor-Smith

The Parker steering committee backed the findings of the McGregor-Smith review, which examined how businesses could better develop the careers of black and ethnic minority staff.

‘In particular, the emphasis on developing people from the outset to build a strong pipeline of potential candidates for management and board directorships is at the core of our recommendations,’ the Parker report said.

Both reports have backed the creation of an official Business Inclusion and Diversity Group, which will feature the respective review committee chairs, Baroness Ruby McGregor-Smith and Sir John Parker, and business minister Margot James.

10. Future progress

In its final remarks on developments since launching for consultation, the Parker review argued that it should continue to meet at least yearly until 2021, citing the timescales of its recommendations.

‘The steering committee and its members will continue to engage with a range of relevant stakeholders and work with the Institute of Directors to ensure that progress is being made and that suitable candidates are being prepared to assume board roles in the future,’ the report said.

Jimmy Nicholls is deputy editor of Governance and Compliance

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