Consumers and shareholders likely to push for greater diversity at the top
So perhaps we should not be surprised that the prime minister's thinking on the issue of worker representation on boards, an initiative she spoke about warmly in October, has moved on, with her announcement recently to the CBI that appointing worker representatives to company boards would not be mandatory.
The prime minister's speech suggested that businesses may wish to implement worker representation schemes voluntarily. Organisations that wish to explore this need only look across the English Channel for inspiration. For example, in Germany, larger companies must appoint a fixed percentage of worker representatives (based on the number of employees) to the supervisory board that scrutinises the actions of the executive board. One criticism of this model is that it can lead to conflicts of interest, with worker representatives being less likely to challenge executive pay if, for example, they can secure concessions on their own pay or redundancy terms. In the Netherlands, by contrast, the model of worker representation is rather different; there workers have the right to nominate independent third parties to be appointed to the board.
Either model would require a significant culture shift for UK organisations, particularly those which do not currently recognise a trade union. For that reason, it seems unlikely that there will be much immediate voluntary take-up.So, where does this leave the drive to increase the diversity of backgrounds and viewpoints on the UK's boards? The Business, Innovation and Skills Committee of the House of Commons launched a wide-ranging inquiry into corporate governance in September and is due to examine the issue of board composition, including how to increase board diversity generally and how to increase the number of women in executive positions on boards.
However, whatever the outcome of that inquiry, it seems clear from the tone of the prime minister's speech to the CBI, and the efforts made to reassure businesses in the autumn statement, that it is unlikely that the government will try to implement significant mandatory measures in the immediate future. Such external pressure as there may be to increase board diversity seems much more likely to be in the form of ‘soft’ pressure coming from consumers, investors, shareholders and campaign groups.
The role of investors is particularly interesting; some investors are increasingly looking at companies' wider ‘social footprint’ as an indicator of how well run the business is. Many studies suggest that companies with more diverse boards tend to perform better financially. The causes are not clear, but identifying wider talent pools, avoiding groupthink at executive level and enabling businesses to serve diverse markets and customers better may all play a part.
The ‘Women in finance charter’ may offer a useful model for achieving such diversity. The charter requires signatories to appoint a director with individual accountability for gender inclusion, for setting internal targets and publishing annual reports on progress against those targets, and linking executive pay to the achievement of those targets. The charter has nearly 100 signatories, including some of the largest financial services firms in the UK, so it appears to have gained significant sector buy-in, although as a fairly new initiative, its efficacy remains to be seen.
The recent Parker report on board ethnic diversity similarly suggests that businesses identify targets for diversity and report on their progress. It recommends that FTSE 100 and 250 companies aim to appoint at least one non-white director by 2021 and 2024 respectively, look actively at developing a pipeline of non-white talent and requiring executive search firms and their HR teams to identify and present suitable non-white candidates for board vacancies. Again, a voluntary charter that enables early signatories to present themselves as forward-thinking and well-managed (and hence attractive to prospective employees and investors alike) may well gain traction.
There is no easy fix; any diversity initiative requires buy-in from the whole organisation, from the top down, in order to be effective, and that it is even more true of board diversity. However, with investors increasingly interested and well-regarded voluntary schemes, the opportunity is there, if UK organisations wish to grasp it.