Boardroom diversity - response to BEIS Select Committee

Diversity in the boardroom is a big issue. There has been significant progress on this issue and many other aspects of corporate governance over the last few decades. And yet, trust has declined and so has performance in listed companies. Shareholder returns versus bonds are the worst since the great depression; investment is worryingly low – net corporate saving is £130bn each year, or an equivalent of 8% of GDP – and boards are seemingly risk-averse. And, of course, there’s the thorny issue of executive pay. So what can be done?  Today I gave evidence to the Department for Business, Energy and Industrial Strategy (BEIS) Select Committee on diversity in the boardroom. I argued that whilst the move for greater gender and ethnic diversity is hugely important, we take a bigger, more systemic view of the issue. Recent progress on gender diversity has been a great success story of what can be achieved with a government instigated voluntary approach. The use of targets, action by prominent figures and transparency has helped drive change. Hopefully progress on ethnic diversity will follow a similar path. However, we need to go further in creating true diversity of thinking, attitudes and experience. Achieving this is a critical step in overcoming the culture of caution and conformity that too often exists in boardrooms. One step is to broaden the pool of people we consider for non-executive director (NED) positions. Currently, this to too biased to finance and other listed companies. The result is boards dominated by a conformist, cautious culture. Instead, we could be drawing on individuals with a broader range of backgrounds – entrepreneurs, venture capital, social enterprise and civil society. Boards surely need creative minds and new ways of thinking about issues honed in other areas of business. They need cognitive diversity just as much as gender and ethnic diversity. We argue this could be supported by shareholder led nomination committees and a stronger stakeholder voice through stakeholder advisory panels. Currently, NEDs and chairman effectively appoint themselves. It is hard for NEDs to challenge effectively if they owe their position on the board to the chairman, and they receive all their information from the executive.  Far better, we believe, would be shareholder-led nomination committees that provide the independence needed to give NEDs the confidence to challenge. Additionally, this would help to improve the engagement with long-term stewardship-focused shareholders. Tomorrow’s Company outlined the benefits of this in its report Bridging the UK engagement gap through Swedish-style nomination committees. Likewise, stakeholder advisory boards allow for more diverse opinions from within the company, giving NEDs information that has not been filtered on its way up through the business, and also allowing a far better understanding of the behaviours, values, and the culture of the organisation. This should importantly include employees, as advocated in a recent Tomorrow’s Company report – Bringing employee voice into the boardroom. We have to be serious about board reform if we are going to restore the public’s trust and improve performance.  And that’s why we believe that our three-pronged approach of shareholder led nomination committees, stakeholder advisory panels, and bringing in NEDs from outside the traditional plc pond, will help foster truly diverse opinions and the radical challenge that is currently lacking from many boardrooms.