Written evidence from the Equality and Human Rights Commission (CGV0152)

1. The Equality and Human Rights Commission is a statutory body established under the Equality Act 2006.  It operates independently to encourage equality and diversity, eliminate unlawful discrimination, and protect and promote human rights.  It contributes to making and keeping Britain a fair society in which everyone, regardless of background, has an equal opportunity to fulfil their potential. The Commission enforces equality legislation on age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation. It encourages compliance with the Human Rights Act 1998 and is accredited by the UN as an ‘A status’ National Human Rights Institution. Find out more about the Commission’s work at: www.equalityhumanrights.com

2. The Commission welcomes this inquiry into corporate governance.  Our submission focuses on consultation questions about the gender composition of boards and executive positions. Our response is based on evidence drawn from our inquiry into fairness, transparency and diversity in the recruitment and appointment practices of FTSE 350 companies, published in March 2016[1]. Our inquiry provides a detailed picture of the practices of the largest publicly listed companies on the London Stock Exchange and their impact on gender diversity.

Directors and duties

Q. How effectively have the provisions of the 1992 Cadbury report been embedded? How best can shareholders have confidence that executives are subject to independent challenge?

3. The Cadbury Report[2] included recommendations about the need for a balanced board composition and selection processes for non-executive directors.

4. In 2003 the Higgs Review[3] critically assessed boardroom practices and effectiveness and examined the roles and responsibilities of non-executive directors (NEDs). An additional report from Laura Tyson[4] looked at non-executive recruitment and development and found that diversity provided a mix of experience and independent and challenging mindsets that produced sound judgements and effective boardroom cultures and performance. Up to that time companies relied on personal contacts to identify the majority of NED board appointees. Tyson recommended that broader, more rigorous and more transparent search processes for NEDs would enhance board talent and effectiveness and also foster greater diversity in the background, experience, age, gender, ethnicity and nationality of NEDs.

5. Despite these recommendations the composition of boards and gender balance had changed little by 2011 when Lord Davies published his review ‘Women on Boards’[5]. Women then comprised 15.6% of NEDs on FTSE100 boards and just 5.5% of executive directors.  The Davies Review made several recommendations, including for a voluntary business-led target for 25% of board members to be women.  This approach made a welcome and significant difference. By October 2015 when Davies concluded his review[6], 31.4% of FTSE 100 NEDs and 9.6% of executive directors were women.

6. However, our FTSE 350 inquiry report showed that although FTSE 100 companies as a group met the 25% target, a large proportion of individual companies had failed to meet it. 45 FTSE 100 companies (45%) and 168 FTSE 250 companies (67%) had not met the 25% target.[7] 

7. The inquiry found that 90% of companies used executive search firms and relied on them to attract or recruit women, but that there was some reluctance to recruit outside normal channels and widen the candidate pool. We found virtually no open advertising of board roles, nor any use of advertising targeted at women to encourage them to apply.

8. Some companies still relied on using personal networks and contacts to identify people for board roles. 58% of companies with no women on their boards used personal networks for NED appointments and 33% used them for executive director roles. Almost a third of companies using personal networks did not use any other means of advertising the post.

9. A few companies were positive about the benefits of widening the pool to any candidates who met the skills requirements, but only 39% companies made appointments from outside the FTSE 350 and, of these, most appointments (53%) came from other private sector employers. Only 25% came from the professions, 9% from the public sector, 6% from academia and 7% from the not for profit sector. 

10. There is some evidence that progress on gender diversity may be stalling[8]. Companies need to take further action to improve women’s board representation and to improve pipeline diversity if the new Davies target of 33% women on boards is to be met.

11. Our inquiry evidence suggests that recommendations in the Cadbury, Higgs and Tyson reports have yet to be fully implemented.  Companies and search firms need to do more to ensure transparency in the appointment process and to deliver the diverse appointments that underpin independent challenge and effective board performance. Our inquiry report sets out a number of recommendations for improvements which we discuss in detail in answer to the questions below.     

Q. Should additional duties be placed on companies to promote greater transparency, e.g. around the roles of advisors. If so, what should be published and why?

12. Our inquiry found that some companies did not carry out and report on their board appointments process in a transparent and clear way. Some companies did report whether or not they had used executive search firms or advertised board vacancies, with occasionally both referred to in Annual Reports.  We found that virtually no companies or search firms had used open advertising in practice.

13. Most FTSE 350 companies used executive search firms for making board appointments and many required these firms to be a signatory to the Voluntary Code of Conduct[9]. We found that these factors had a positive association with the appointment of women to boards. However, we concluded that in some cases longstanding, overly close relationships between companies and executive search firms might result in an opaque recruitment process and lack of diverse search networks.

14. The inquiry recommended that companies take a range of actions to improve transparency and diversity in the search process. We suggest that companies could describe how they have met these recommendations as part of their annual reporting narrative on board appointments.  We recommended that companies:

• select an executive search firm that can demonstrate its effectiveness in improving diversity in appointments
• avoid giving unlawful instructions to an executive search firm, such as requesting an all-women long-list or shortlist
• broaden their candidate pool by advertising widely through appropriate channels, unless a role is business-sensitive
• avoid relying only on personal networks to identify potential candidates.   

15. Our inquiry also identified concerns about the way that some nomination committees led and reported on board appointments. Some respondents described the nomination committee as ‘the poor relation’ of board committees, with less rigorous disclosure requirements than those for the audit and the remuneration committees. One company chair called reports from the nomination committee ‘anodyne’ and a business organisation described them as ‘boiler plating’, as the reports did not provide much detail about the appointment process or how it had taken diversity into account.

16. A recent review of corporate governance in the FTSE 350[10], found a small improvement in the number of nomination committees disclosing information about their duties and work: 48% provided detailed information in 2015 compared with 42% in 2014. However, the nomination committee met least often, with the average number of meetings being 3.3 compared with 4.7 and 4.8 for the audit and the remuneration committees respectively. Eleven committees did not meet at all during the year. All of these were FTSE 250 companies, with five from the financial services industry. One of the 11 did not have a nomination committee and five had committees that did not meet, despite four of the five appointing new NEDs during the year[11].

17. The Commission’s inquiry report recommends that the Financial Reporting Council should clarify the role and remit of the nomination committee and its chair in relation to diversity and board appointments, and its disclosure requirements in the annual report.

Executive pay

Q. How should executive pay take account of companies’ long-term performance?

18. The Commission recommends that executive performance pay should take into account performance on equality and diversity objectives, which should be set annually for all executives (these might include recruitment targets to senior management levels and reduction of pay gaps). Companies must ensure  these objectives can be reasonably met to avoid staff taking unlawful steps to meet a target, for example appointing people solely because they are a woman or from an ethnic minority .

19. We welcome that over 70 banks and City firms have signed up to the Women in Finance Charter[12] and have agreed to link the pay packages for their top executives to gender diversity targets. In particular, we welcome companies’ commitment to publishing their gender targets online and to reporting on them to the Treasury annually, explaining the link between executive pay and progress against targets.

20. Extending this initiative more widely across the FTSE 350 would drive women’s representation at executive level and on boards.

Composition of boards

Q. What evidence is there that more diverse company boards perform better?

21. Diversity on boards is not simply an issue of fairness: research suggests that more diverse boards bring positive benefits to businesses. A number of studies show an association between the numbers of women on FTSE boards and improved financial performance.[13]

22. There is also widespread agreement that diverse boards reflect good corporate governance and better decision making. The UK Corporate Governance Code[14] recognises that diversity enables constructive dialogue and challenge, and prevents the ‘groupthink’ that hinders the efficient operation of a business. More diverse boards also reflect companies’ ability to draw from the widest talent pool in their appointments.[15]

Q. How should greater diversity of board membership be achieved? What should diversity include, e.g. gender, ethnicity, age, sexuality, disability, experience, socio-economic background?

23. A diverse board reflects better recruitment processes drawing from a wider pool which will include people from different backgrounds and with different characteristics[16]. Our inquiry looked in detail at how open and transparent the board appointments process was and how it could be improved to increase diversity. Although the focus of the inquiry was on gender diversity, the findings and recommendations are applicable to other aspects of diversity. 

24. Our inquiry found some appointment practices that hindered greater diversity of board membership. These included:

• lack of board diversity policies, targets and positive action to support them: while 76% FTSE 350 companies reported having a policy on boardroom diversity, just 38% had gender targets. Many companies believed that targets were inconsistent with appointment on merit.
• role specifications unnecessarily limiting the pool of applicants: some role profiles asked for previous FTSE board experience rather than specifying skills and experience (such as corporate governance), so ruling out potentially suitable candidates from other sectors; other role profiles sought chemistry and fit with other board members but without defining these qualities, so leaving decisions open to subjective judgment and making it more likely a board would appoint candidates in its own image.
• no use of open advertising or advertising targeted at women to encourage them to apply and reliance on the use of personal networks with no other means of publicising a post
• many companies did not regard applications from outside the FTSE 350 as an effective way of widening the candidate pool. These companies said candidates from other sectors were unlikely to have the appropriate skills, experience or cultural fit they required.
• companies instructing their executive search firms specifically to find women or set quotas for the number of women on a long or short list which is unlawful; or specifying age or nationality which is likely to be unlawful
• for executive director roles, many companies identified potential candidates in their internal talent pool and through succession planning, sometimes making appointments without due process
• just 13% companies provided training on equality law and avoiding unconscious bias to people involved in the appointment process.

25. To achieve greater diversity on boards the inquiry recommended:

• setting diversity targets and giving a clear brief to agencies and search firms
• defining objective and measurable criteria in job profiles and person specifications which attract the widest possible pool of candidates
• using a range of recruitment methods including targeted advertising of underrepresented groups; searching for suitable candidates from other sectors such as the professions or not for profit sectors
• using a formal selection process which is transparent and rigorous
• providing training for those involved on the equality legislation and unconscious bias
• promoting diversity in succession planning and the talent pipeline; using positive action measures to encourage individuals from under-represented groups to apply for roles or to help them gain skills to compete on merit and an equal footing with others (see paragraph 32 below for examples)[17]
• nomination committees to be involved in setting, monitoring and reporting on progress on the company diversity policy and targets at board and executive level. 

26. Our guidance, ‘How to improve board diversity: a six-step guide to good practice’[18] sets out key steps and gives practical examples of how to promote greater diversity in the appointment process.

Q. What more should be done to increase the number of women in executive positions on boards?

27. The inquiry found that nearly three-quarters of FTSE 100 companies and 90% of FTSE 250 companies had no female executive director in 2013/14. Of the 30 companies that had made executive director appointments, only 12 appointed a female executive director. Men outnumber women in senior management positions in the FTSE 350 by a ratio of approximately 4:1. This shows that companies face a considerable challenge to improve the proportion of women in their talent pipeline, and ultimately the proportion of women in executive director board roles.

28. Our inquiry also found that less than half of FTSE 350 companies (47%) had a senior management/executive level diversity policy and less than two-fifths (38%) of these had set gender targets, believing them incompatible with appointment on merit or not helpful in driving improvement.

29. In July 2016 the Chair of the Commission called for a new national target that half of all new appointments to senior and executive management level positions in the FTSE 350 and all listed companies should be women from now on. This will guarantee a strong pipeline of women for the top jobs.

30. Some respondents to our inquiry reported that nomination committees did not manage succession planning effectively and could do more to hold the executive team to account on developing diversity in the talent pipeline.

31. Internal sponsorship as the basis for promotion may restrict diversity in the pipeline. The talent pipeline and succession planning should be open to all with talent and potential and companies should consider taking positive action to improve the balance of men and women in senior appointments[19].

32. Just 41% of companies reported that they undertook activities to encourage applications from women for senior level or board appointments. Companies that did undertake activities reported on a range of measures to develop the female talent pipeline within their company.  The most popular were:

• considering women for internal promotions at senior management levels (79%)
• offering flexible working and part-time working at senior management levels (75%)
• providing networking opportunities for women (68%)
• providing mentoring and sponsorship programmes for women (61%)
• providing flexible career paths to complement life cycle choices (46%)

33. Companies with a high proportion of women on their boards were more likely to offer flexible and part-time working at senior levels, networking opportunities, mentoring and sponsorship programmes.

34. Some companies described development programmes to support women’s progression into senior roles, sometimes linked to succession plans or company diversity policies. These included:

• accelerating the development of high-potential women through mentoring,  leadership programmes for women, or providing operational experience required for more senior roles
• management and leadership development programmes for women
• group talent and succession planning for top managers which explicitly reviewed and monitored progress of female talent
• monitoring diversity of nominations to senior leadership development programmes and actively ensuring female representation on each course 
• ensuring the diversity of the intake for graduate and management training programmes
• unconscious bias training for all staff to enable non-discriminatory recruitment or appraisal practice  
• encouraging women to seek non-executive director role in other companies as part of their personal development.

35. Companies also can have an impact on the retention, development and promotion of women through the way they manage those who are pregnant and return from maternity leave[20] and the way they retain and develop women who have children. They can do this by offering flexible working and flexible career paths that allow for periods of part-time work or reduced ability to travel due to child care. Many companies offered (or said they were planning to offer) flexible working patterns to all employees, including at senior management and executive level. A few companies said they had projects to retain women who returned to work after maternity or shared parental leave.  

October 2016

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