Although some progress has been made in improving diversity on boards, many companies have been slow to do this or have even gone backwards. According to Spencer Stuart’s 2023 UK Board Index, the proportion of first-time, female and minority ethnic candidates on boards of the UK’s biggest listed companies fell sharply last year. This included a 44% drop in newly appointed NEDs with a minority ethnic background and a 13% drop in new NEDs that are first-time directors.
The picture seems to be worse for quoted growth companies. According to research from Women on Boards UK published last year, half of the companies outside the FTSE 350 missed the target of having a third of their board roles occupied by women. Research from Addidat proprietary dataset also found that 42% of all AIM listed companies did not have any women on their boards in 2022.
There is clearly still much to be done.
Barriers to achieving diversity
Building a diverse board is essential for the success of businesses. Recent research by the Financial Reporting Council found that higher levels of gender diversity on FTSE350 boards correlate with better future financial performances. Unfortunately, views on diversity at board level remain mixed, particularly among smaller companies. The responses from our recent NED survey with the Quoted Companies Alliance, which surveyed over 100 NEDs of quoted growth companies, revealed that diversity is still a divisive topic.
Diversity is sometimes disparaged as a “box ticking” exercise that encourages positive discrimination at the expense of the best candidate; a notion framed by the comment “the correct people are better than diversity.” Whilst we acknowledge that growth companies need the best talent around the table, we need to move away from the assumption that the two concepts are mutually exclusive.
Starting from first principles, diversity, perhaps best framed as cognitive diversity, helps challenge assumptions and refine strategic decision making. Conversely, ‘groupthink’ prevents leaders from hearing alternative views and holds a reputation for causing blind spots in decision making.
The way forward
It’s time to shift the dial on this. The focus must be on the changes that need to happen to make a difference.
While there are inevitable growing pains borne from market pressure to apply a quota-driven governance structure, there are a few obvious wins that would inevitably deliver a better outcome.
At the crux of it, there needs to be a market-wide strategy to widen the pool of diverse talent. We need to address the structural imbalances to ensure that boards have the widest pool of talent available to them. This will be achieved through better education, management, sponsorship and mentoring. All market participants have agency in making this happen and as the largest adviser to growth companies on AIM, we have been working on initiatives to help improve this.
Boards also need to take a closer look at their selection process and ask the right questions. Has an assessment been conducted around skill gaps on the board? Have the skillsets required been clearly defined and made a primary focus in the hiring process? Has the hiring process been carefully designed to deliver a strategic outcome? Having a thorough and carefully designed selection process will help establish the right combination of background, experience and skillset. As the adage goes “you get out what you put in.”
All new NEDs should also have a full, formal and tailored induction when they start, enabling them to understand the board’s expectations about the role and their performance.
There’s no doubt that the expectations and demands on boards are constantly evolving. If companies want to meet these expectations, they need to prioritise building a diverse board with a mixture of viewpoints, ideas and approaches to help tackle the increasingly complex, unpredictable and challenging business landscape. There is never a better time than now to start doing things differently; boards need to embrace diversity, after all, by design it should deliver better outcomes.