In July 2021 The Financial Reporting Council in the UK published its findings on Board Diversity and Effectiveness in FTSE 350 companies. The report identified that higher levels of gender diversity of FTSE 350 boards were positively correlated with better future financial performance (as measured by EBITDA margin), with the effect being the strongest after three to five years. Better-performing firms experience greater benefits in terms of financial performance from gender diversity. Specifically, based on average EBITDA margin, the analysis showed that the top 50% of the sample of companies that had at least one woman on the board experienced higher levels of EBITDA margin after three years. Likewise, FTSE 350 boards with well managed gender diversity contribute to higher stock returns, and are less likely to experience shareholder dissent.
Suggested actions for Nominations Committees to encourage diversity include:
• Undertake skills assessment
• Manage the pipeline of diverse talent
• Set clear targets
• Report regularly and publicly on progress towards targets
• Provide a clear mandate to a search firm with a diverse talent pool
• Ensure that Nominations Committees themselves are diverse
• Start the search early and take time to build longer term relationships with potential appointments
Boards need to:
• Rethink how they understand diversity; for example, they should stop seeing movement on diversity and inclusion efforts as either a binary or linear progression
• Understand that diversity is a long-term, multi-stranded journey where progress in one area is not a guarantee of progress in another
• Recognise that building and maintaining diversity requires proactive planning, concrete actions and consistent prioritisation
• Place much greater emphasis on both self and board-level development, to be world class
• Understand how directors’ conduct or ways of working together are helping or hurting them in their efforts to become both more diverse and effective.
The results suggest three conclusions.
First, that many board members have largely committed to diversity and boards have made efforts to change, with some success especially in relation to gender diversity.
Second, that the effort to diversify boards does return benefits in terms of boardroom culture and performance.
Third, that boards still have a very long way to go to fully access the talent and reflect the population of the UK.
The report can be downloaded at: https://www.frc.org.uk/getattachment/3cc05eae-2024-45d8-b14c-abb2ac7497aa/FRC-Board-Diversity-and-Effectiveness-in-FTSE-350-Companies.pdf