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FRC publishes a report on board diversity and effectiveness in FTSE350 companies

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23 Jul 2021

The Financial Reporting council (FRC), in conjunction with London Business School, Leadership Institute and SQW has published the results of research which looked at board diversity and effectiveness in FT350 Companies.

The report highlights that there has been a 'step change' in the diversity of boards of FTSE companies primarily driven by the Hampton Alexander review and more recently the Parker review.  The report seeks to address three questions:

  • How have board effectiveness and dynamics been impacted by the increased gender and ethnic diversity of board membership?
  • What attributes, skills and experience do today’s board members expect to be needed in the diverse boardrooms of the future?
  • How can nomination committees be helped to take a more objective
    and diversity-friendly approach to board recruitment?

Data was assembled from multiple, publicly available sources to create a large data set looking at gender and ethnic diversity and its effects over the medium and long term – between 2001 and 2019 – on EBITDA margins, stock returns and shareholder dissent.  In the second phase of the research, a representative sample of 25 boards was asked to complete an assessment of the culture and dynamics in their board, as well as respond to a series of open-ended questions.

The research highlights that it is the responsibility of the board to drive inclusion.  It also highlights that in order to maximise the benefits of diversity, the board should recognise that change takes time and that diversity without inclusion is unlikely to encourage new talent to the board.  Additionally the research identifies that diversity, over time, improves the performance of boards and the businesses they lead.

The research found that:

  • higher levels of gender diversity of FTSE350 boards positively correlate with better future financial performance (as measured by EDITDA margin).
  • FTSE350 boards with well-managed gender diversity contribute to higher stock returns and are less likely to experience shareholder dissent.
  • Diversity affects boardroom dynamics and that the percentage of women is highly correlated with an emphasis on boardroom relationships and collaboration.  The research found that the hallmarks of boards with more women included:
    • significantly greater decentralisation in how they operate where committees have strong delegated powers;
    • increased likelihood of reaching consensus before important decisions are taken, rather than undertaking decisions that a substantial part of the board opposes (e.g. by voting);
    • stronger belief and action on ensuring fair outside search when recruiting directors because standards should apply to everyone equally; and
    • reduced overconfidence about the board’s problem-solving skills.
  • the skills needed in the diverse boardrooms of the future included adaptability and resilience, strategic thinking, stakeholder engagement, interpersonal skills and embracing diversity.
  • there are a number of actions that the Nomination Committees can take to encourage diversity.  These include ensuring that the Nomination Committee is itself diverse and has a clear mandate to work with search firms that access talent from wide and diverse pools

The report concludes that whilst many board members are committed to diversity and many have made effort to change, there is still a 'very long way to go to fully access the takent and reflect the population of the UK'. 

The press release and the research report are available from the FRC website.

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