The Ethics of Diversity

This post presents an overview of a recent report from the UK’s Institute of Business Ethics, entitled The Ethics of Diversity, published on 17^th December 2020. It is based on comments I made at the webinar to launch the report, of which I am lead author.

The Ethics of Diversity provides a practical guide as to why diversity matters for boards, companies and their stakeholders. There are important ethical dimensions in the framing of diversity in terms of the questions asked and the solutions presented. The report seeks to provide boards with a framework for understanding these ethical dimensions and addressing them systematically.

The report reflects on what has been achieved from the ten years of sustained efforts in the UK to improve gender diversity and the lessons learned from the multi-stakeholder approach. It looks forward and considers initiatives to improve other dimensions of diversity. Academic and practitioner research on the various proof points for diversity are examined, including the business case and in how board governance can be enhanced, and the risk of groupthink lessened, through improved board diversity.

The report considers how the Covid-19 pandemic has amplified existing systemic risks related to inequalities and how these have been heightened further by the global focus on racial injustices, all of which have brought a new urgency to the diversity agenda. This is particularly evident in the role that investor stewardship is increasingly playing in driving change.

Having been involved in diversity advocacy since 2011, the pace of change in the past year, and the evolving expectations on companies, their investors and society more generally, has been unparalleled, in my opinion. It is also important to reflect that existing systemic inequalities were already being exposed through movements such as Me Too prior to the pandemic.

The Ethics of Diversity offers guidance on how boards can get ahead of the curve on all dimensions of diversity to achieve more inclusive and successful corporate cultures through strategies that embrace and value diversity of thought and experience. Such strategies can also break down the barriers that marginalised groups face within and outside organisations. The report concludes with a series of 10 recommendations as to how a board can embrace cognitive and experiential diversity and unlock the sustainable business benefits that will flow.

Diversity is a challenge to entrenched status quos that will sometimes resist their dismantling, but improving corporate cultures to the benefit of all stakeholders requires boards to have the courage to ask themselves searching questions and face into the consequences of their answers.

Overview of The Ethics of Diversity

The report starts with an exploration of the importance of diversity and the challenge of groupthink. It examines diversity of thought and experience and why diverse teams make better decisions. The work of Professor Scott E. Page, the American social scientist who specialises in economics, political science and complex systems, evidences a “diversity bonus” where diverse groups almost always outperform homogeneous groups. [1] The risk of groupthink is explored through the work of Irving Janis, [2] and the report considers how groupthink impacts on board decision-making and how diversity is vital to stymie groupthink and to enhance team performance.

The changing collective skill set of the board is considered amidst calls for more health professionals on boards and the need to ensure the management of other systemic risks such as climate change. All of this should be factored into board succession plans as boards face a new and much more challenging landscape.

Chapter 2 reflects on the ten years of efforts to improve gender diversity in the UK, including why we started with gender and key developments such as the UK Government-backed Davies Review and Hampton-Alexander Review as well as legislation such as the gender pay gap. Other important levers of change are also examined, such as the UK Corporate Governance Code, the UK Stewardship Code and the advocacy work of the 30% Club and its UK Investor Group. [3]

The report discusses the power of investor capital in promoting and driving change on gender diversity. The growth of the 30% Club UK Investor Group is testament to this. From 7 members with £1.6 trillion in assets under management in 2011, the Group now has 39 members from across the investment chain with £11 trillion in assets under management. This is a strong and important signal to the entire UK market, and globally, about how important diversity is to long-term investors. There are also now equivalent investor groups in Australia, Brazil, Canada, France and Japan.

One of the most effective features of the 30% Club’s Investor Group has been its Statement of Intent, issued in October 2016. This purpose of this is to “signal the collective voice of the 30% Club Investor Group to companies and the wider marketplace, and to demonstrate the ways in which their members will use their ownership rights and undertake stewardship to encourage progress on gender diversity.” In addition, the Statement indicates that investors will applaud exemplars of best practice as well as engage with laggards.

The report then examines what has been achieved in the FTSE 350 index of companies in terms of meeting targets set by the Hampton-Alexander Review and Davies Review as well as the 30% Club. It is stressed that meeting these targets represent minimum thresholds, not the end goal. Gaps are identified, such as the lack of sufficient female representation at Board Chair and CEO level as well as amongst Executive Directors, the high number of all-male Executive Committees that still exist and how the drive for more board gender diversity has not led to a sufficient increase in women of colour on boards.

Chapter 3 looks at whether the focus on gender diversity has delivered on its full potential. The traditional business case for diversity is explored, including evidence of corporate outperformance when adding women, or members of any under-represented group, to boards and executive teams. Evidence from McKinsey, Credit Suisse and others is considered in this regard, as well as the challenges of causation and correlation.

The unethical connotations of seeking to link diversity to the bottom line are also explored. From the work of the late Professor Katherine W. Phillips, the American business theorist and advocate for workplace diversity, it is clear that linking improved diversity to enhancing the bottom line has unethical dimensions to it because it reinforces the idea that some people belong and others have to prove that they do. Professor Phillips argued that the proof points sought for diversity have power in them and often serve to reinforce the status quo. [4] Therefore, whilst the business case for diversity remains strong and is now generally accepted, we should ask whether it is time to move the focus away from the business case, particularly in the traditional sense of enhanced company performance.

The report then explores the other ways in which we can understand the impact of increased gender diversity at board level, including academic research examining improvements to board governance, risk oversight and the sustainability profile of the company. For example, the report examines the important concept of “substantive gender diversity”, explored in academic research (discussed on the Forum here) by Professor Yaron G. Nili, a professor at the University of Wisconsin-Madison law school, which argues that it is not just about having more female directors on boards, it is also about the roles they take and the “clout” they have. [5]

The report considers why, in the UK, female directors tend to be in certain leadership roles but not in others. Data from BoardEx indicates that there is now a majority of female Remuneration Committee Chairs amongst the FTSE 350 index of companies. But women do not seem to be appearing in Board Chair roles, other Committee Chair roles or CEO roles to nearly the same extent. Sir Philip Hampton, Chair of the UK’s Hampton-Alexander Review, recently referred to the lack of sufficient female representation amongst Board Chair roles and across all Committee Chair roles as “a structural subordination of the female role.” [6]

Leveraging gender differences in leadership traits is also examined. Understanding such differences also switches the narrative to what women bring to organisations rather than what men have to ‘give up’.

On gender diversity, the key conclusion is that there is still much to be done in delivering on the full potential. The report argues that improvement has not been seen consistently because a compliance mindset in simply meeting diversity targets is not enough.

Progress continues on the target-based approach to improving gender representation and a similar approach has been adopted to increase ethnic diversity at board level through the recommendations of the UK Government-backed Parker Review. But to achieve cognitive diversity, there needs to be a move beyond meeting targets to a focus on the qualitative aspects in addressing imbalances in identity diversity, be that gender, race, ethnicity, disability or sexuality, by bringing a diversity of lived experiences.

Chapter 4 argues that inclusion requires a genuine commitment to change. Boards need to get ahead of the curve on all dimensions of diversity. Diversity has to permeate at a strategic level and across the entire operations of the board, the Executive Committee and the company as a whole. An important first step is reporting on how diversity links to strategy, a key requirement of the UK Corporate Governance Code.

Recent research from the Financial Reporting Council on how UK companies are reporting against the Code [7] highlighted that many companies still approach it as a “box-ticking exercise”. On diversity, many companies stated its importance and the importance of diverse boards but offered little explanation in the way of evidence to support their assertions, including: a lack of targets to improve diversity at the board and executive committee levels; little or no discussion of succession planning; and minimal reporting on how board evaluations are leading to the development of diverse talent pools. Such a compliance approach to diversity is one of the key risks highlighted in the report.

The evolving expectations of investors on all aspects of diversity are then explored. This involves actors across the investment chain, from asset managers and pension funds to activist shareholders, and efforts that are collective and collaborative as well as unilateral. The role of investors as stewards of capital in how they engage with investee companies and vote at annual shareholder meetings is also highlighted. Diversity themed investment funds, including in equity and through social bonds, are also focusing efforts and driving demand. The vital role that executive search firms play in improving diversity is considered as well as the increasing demands of all stakeholders.

The report concludes with a Call to Action and a series of 10 practical recommendations that boards can embrace to unlock the sustainable business benefits from making systemic, rather than cosmetic, changes. The recommendations also present a framework for engagement by investors in understanding how diversity is leveraged as a strategic imperative for companies and how the risk of groupthink is managed, and the benefits of diversity are harnessed, in the boardroom.

10 key recommendations:

1. Understand and explore the diversity of thought and experience on the board
2. Ensure that the company’s push for diversity and inclusion is a strategic and commercial imperative for the organisation
3. Look critically at the culture in the boardroom
4. Review nomination and succession planning processes for all board and executive committee appointments
5. Look critically at the individual roles assigned to board members
6. Learn from the experience of improving gender balance and learn from the experience of other sectors
7. Understand the company’s stakeholders. Actively listen and respond to them
8. Communicate aims and milestones internally and externally
9. Learn from a more challenging board evaluation
10. Recognise inequalities and racism as systemic risks to the economy and see diversity and inclusion as an opportunity for long-term change

Under-representation at board level on gender, ethnicity and other aspects of identity diversity is part of a wider framework of systemic inequalities that are risks to the economy and to society. Boards should recognise the role that all companies have in being part of the solution. They should encourage and lead conversations on difficult and complicated issues related to power, status quo, representation, fairness, meritocracy, equality, opportunity and the inherent barriers faced by certain groups within companies and wider society. Open and honest dialogue around the board table is the best place to drive real change. It is clear that the opportunity to instil long-term and sustainable change can only be realised and delivered by a diverse board.

As we continue the drive for more gender diversity, increase efforts to address the slow pace of change on ethnic representation on boards, and think about LGBT+ equality, disability, neurodiversity and social mobility, we need the entire eco-system around boards and companies to contribute and be part of the solution.

Systemic change requires all of us to act, individually and collectively. The opportunity is enormous. There is still much to do.

The complete publication, including footnotes, is available here.

Endnotes

1S.E. Page (2017) The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy(go back)

2I. L. Janis (Psychology Today Magazine, 1971) Groupthink(go back)

3 https://30percentclub.org/initiatives/investor-group(go back)

4K.W. Phillips (2017) What is the Real Value of Diversity in Organizations? in S.E. Page (2017) The Diversity Bonus: How Great Teams Pay Off in the Knowledge Economy(go back)

5Y.G. Nili (2018) Beyond the Numbers: Substantive Gender Diversity in Boardrooms(go back)

6Sir Philip Hampton speaking at the FutureBoards Cross Border Dialogue on Women in Finance, 25^th November 2020. For a recording of the discussion, see here: https://vimeo.com/485416432(go back)

7Financial Reporting Council (2020) Review of Corporate Governance Reporting(go back)