UK Boardroom Diversity Targets Explained

UK companies have met gender diversity targets, but will ethnic minority representation on FTSE boards be harder to achieve?

James Gard 8 March, 2021 | 8:46AM
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Diverse employees

Long characterised as “pale, male and stale”, the boardrooms of FTSE companies are coming under pressure from investors to improve the representation of women and ethnic minorities. This year's AGM season is expected to be a key focus for this drive for change, not least because it’s the first year that companies will be reporting how they’ve met the targets under the “Parker Review” on improving cultural diversity.

Let's run through the key targets on gender and race in the boardroom and rate how UK companies have responded to these:

The Hampton Alexander Review

The first point to make is that UK listed companies have been set “targets” by the UK Government, but these aren’t legally mandated, unlike in other countries. The independent Hampton-Alexander Review was set up in February 2016 to improve the representation of women in the boardroom above 30%, and it has just released the last of its annual reports. (This replaced the Davies Review, which was set in the wake of the financial crisis and reported every year from 2011-2015.) The UK also has an investor coalition known as the “30% Club”, with the same aims.

UK Gender Targets Met

Headline figures from the final report reveal that women represented 34.3% of FTSE 350 boards by January 2021 – up from 21.9% in October 2016 – with the number of women on boards rising from 682 to 1,026.

This achieved the 30% target expected by the Government and the Review will no longer report. The Review’s chairman, Sir Philip Hampton, said: “There’s been excellent progress for women leaders in business over the last 10 years or more, with boards and shareholders determined to see change.” He added that this change has been driven by the rise in women taking non-executive roles, and in future women more women need to take up top executive roles to maintain this progress. (Non-executive directors sit on boards but usually don’t have a say in the day-to-day running of companies, unlike the chief executive, chairman and finance director roles).

FTSE Female Representation

Since 2015, the number of all-male boards in the FTSE 350 has dropped from 15 to 0, while the number of boards with more than 33% of women has increased from 53 to 220. UK Business Secretary Kwasi Kwarteng, who heads the business department that set up the Review, says the figures highlight the success of the “voluntary, business-led” approach taken by the UK. But he warned against complacency, particularly with the coronavirus’s impact on the jobs market.

It's generally seen as a positive trend for more women to be represented at a senior level, but why does boardroom gender diversity matter for investors? Kasey Vosburg, an analyst at Sustainalytics, says more diverse boardrooms help to attract and retain talent, improve decision-making and innovation. A key benefit, she adds, is that the public perception of a company improves with a more diverse board - and that creates goodwill among customers and suppliers.

But Vosburg also says that gender diversity among staff is just one aspect of the drive towards greater equality in companies. The gender pay gap is also a keen issue, with only a small percentage of global companies auditing and reporting on pay data by gender. "Research shows that disclosing gender pay data helps to shrink wage gaps, with no negative impact on profitability," she says.

Gender to Ethnic Diversity

The next battlefront for activist investors, according to the Investment Association, is to boost ethnic diversity in the boardroom. To that end, the Parker Review was set up in 2015 – the Government said it “considers how to improve the ethnic and cultural diversity of UK boards to better reflect their employee base and the communities they serve”. 

The aim was for FTSE 100 companies to have one board member from an ethnic minority by 2021 and for FTSE 250 companies to reach that target by 2024. In 2020’s report, the review’s chairman, Sir John Parker, said that UK companies still have a lot of work to do to meet these targets and that progress is very slow in this area.

2021 is the first “target year” for companies to report whether they have met them. Last year’s response was not promising. The Investment Association says 75% of FTSE 100 firms failed to update investors on how they were doing towards making the “1 By 2021” target. The IA, through its institutional voting service IVIS, is planning to issue an amber warning to companies that do not reveal the ethnic make-up or their boards, or how they plan to reach Parker Review targets. 

Job Done?

The debate over targets versus laws as a way of improving boardroom diversity will no doubt continue way beyond this year’s AGM season. Norway and France, for example, have mandatory quotas that are much tougher than the UK’s 30% target, and companies face fines and sanctions for not complying.

The Hampton-Alexander Review is no more but does that mean it’s “mission accomplished” in terms of improving gender diversity?

Neville White, head of responsible investment policy and research at EdenTree Investment Management, says the the Review has been a resounding success without needing to resort to quotas. But there is still a long way to go, he says, and he is concerned that without the pressure of the annual review, the progress of momentum may slow.

Still, he thinks that pressure from fund managers and from the wider investing public is making companies more alert to societal changes: “Going forward, and without the annual nudge of Hampton-Alexander to provide encouragement, Investors will continue to have an important role in engaging for change at Board and executive level to ensure all talent is harnessed, encouraged and progressed.” 

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James Gard  is content editor for Morningstar.co.uk