It’s tough at the top: why CEOs and the new PM may share a challenging future
10th January 2019 3 minutes read
New research from Green Park reveals institutional investors believe that by 2022 the ethnic composition of company boards will be an important consideration when determining investment strategy. More than half (56%) of institutional investment managers believe the diversity of company boards will be a key factor in determining an investment case.
Investment professionals are anticipating a significant shift in the position of their industry, as only six per cent of this group believe ethnic diversity is a major consideration today. Indeed, almost half (48%) currently believe the ethno-cultural composition of the board is no consideration at all.
When institutional investors were questioned as to why so many organisations have all white boards half (50%) said it was because people tend to recruit senior leaders in their own image and are slow to change. A further 37% felt that boards don’t understand the financial value of having a diverse board.
The research reveals investment professionals recognise barriers exist to building greater diversity amongst the upper echelons of management in UK firms. More than a quarter (27%) of respondents highlighted that boards don’t have access to the right talent pools and networks to find candidates outside their usual mono-cultural targets, they also fail to build a pipeline of ethnically diverse future leaders.
Table one: Reasons institutional investors believe so many companies still have all white (mono-cultural)
|Reason||Percentage of institutional investors that agreed|
|Boards want to appoint the right candidates for the job rather than positively discriminating in favour of black or Asian candidates||52%|
|Boards tend to recruit senor leaders in their own image and are slow to change||50%|
|They don’t understand the financial value to business of having a diverse board||37%|
|Boards don’t have access to the right talent pools and networks to find candidates outside their usual mono-cultural targets||27%|
|They fail to build a pipeline of ethnically diverse future leaders||27%|
|They are not obliged to build a pipeline of ethnically diverse future leaders||18%|
|There is no clear regulation from government||5%|
Source: Green Park 2017
Raj Tulsiani, CEO of Green Park, said: “Institutional investors increasingly recognise companies with homogenous all white boards aren’t best placed to deliver future success. Regressive companies with a mono-cultural leadership don’t represent the diverse views of their employees, business partners or customers. Indeed, firms without a demonstrably diverse workforce may struggle to attract investment and funding in future. Progressive investment professionals recognise that firms need to increase their diversity pipelines immediately, to deliver effective succession plans for the future.”
The research also explored the developments institutional investors believe will have the biggest impact in delivering the appointment of more ethnic minority leaders in the UK. They believe proactive lobbying (36%) would be most effective at board level, followed by campaigning for more diverse talent pipelines. Almost a quarter (25%) thought direct action using the threat of reduced, or the complete removal of, investment would be effective in encouraging reformulation of company boards. More than one in ten (13%) believe voting against remuneration reports is a strategy to effect business change.
There is a divergence of opinion amongst investment managers as to the value of diversity at board level. Over half (52%) of institutional investors believe a diverse board helps people understand the changing requirements of a diverse customer base, while 39% believe they are better placed to understand the changing requirements of an international customer base.
However, the research also reveals there is a need for greater education amongst sections of the investment management community regarding the benefits of diversity. Sadly, a quarter (25%) of those in this sector don’t necessarily think boards need to be more diverse. Almost a third (30%) of respondents feel having an ethnically diverse board has no bearing on the commercial success of a firm. This flies in the face of research that shows companies in the top quartile for racial and ethnic diversity are 35 percent more likely to have financial returns above their respective national industry medians2. In addition, 13% of respondents felt there was no truly effective mechanism to drive companies to make their boards more diverse, despite the opportunities that exist for governments to make it a legal necessity.
Table two: Developments institutional investors believe will have the biggest impact on unblocking appointment of more ethnic minority leaders in the UK
|Strategies||Percentage of institutional investors that agreed|
|Lobbying for a more diverse board||36%|
|Lobbying for a more diverse talent pipeline||33%|
|Measuring leaders’ performance against clear targets for progress towards a more diverse board||30%|
|I don’t think necessarily boards need to be more diverse||25%|
|Using the threat of reduced or removal of investment would be effective in encourage reformulation of boards||25%|
|Voting against remuneration reports||13%|
|There are no truly effective mechanism to drive companies to make their boards more diverse||13%|
Source: Green Park 2017