It was not their finest hour, but nor was it their fault. Just as the Financial Reporting Council (FRC) was poised to issue some really solid research showing the effect that diversity, and particularly women, had on both board performance and the bottom line, the government, by a combination of bouncing out existing members and not approving appointments, reduced the FRC’s number of women on its board to one.
That’s politicians for you: never grasping what is going on in the wide world outside of their own narrow wee burrows. Had they but stuck their snouts up long enough to read some of the FRC’s report, carried out by London Business School and other researchers, they would have learned that, when both business and diversity managed to combine, then the trajectory was largely upwards.
Twenty years of data showed how the effect came through. ‘Higher levels of gender diversity of FTSE 350 boards positively correlate with better future financial performance (as measured by EBITDA margin), with the effect being the strongest after three to five years’, the FRC's report said.
The long push for diversity is not about simple gender parity but a cultural evolution that makes companies work better
‘Specifically, based on average EBITDA margin, our analysis shows that the top 50% of the sample of companies that had at least one woman on the board experienced higher levels of EBITDA margin after three years’.
Not only that but it all made life easier – not just for the stock price, but also for placating pesky shareholders. It found that: ‘FTSE 350 boards with well managed gender diversity contribute to higher stock returns, and are less likely to experience shareholder dissent’.
And the news continued to be good. ‘Better-performing firms experience greater benefits in terms of financial performance from gender diversity’, the report went on.
There is still a dearth of executive directors; that is where the real effort should be made
Focus on executives
It is a long, comprehensive and thoughtful report. And it is timely, too. The Financial Conduct Authority is poised to ramp up the percentages of women that should be on boards and, in particular, the areas where boards fail. And that is in the area of executive directors.
Companies have found it relatively easy to appoint non-executive directors. But there is still a dearth of executive directors; that is where the real effort should be made. If gender diversity of boards really does make a difference, then it will make even more of a difference where women directors are executive rather than non-executive.
The report is full of insights from the people the researchers interviewed. This is what Anne Stevens, non-executive director at Anglo-American, is quoted as saying:
‘When I interview woman-to-woman [prospective board members], women will dig into what is really the culture of the board. What is the ability to be heard and is it a group-think? Women tend to probe on those types of issues in an interview more than men do. Men really never go there. They may go to the power of the board, but they won’t go into the really cultural workings of the board.’
Cultural evolution
And this comes through over and over in what the report is saying. What the long push for diversity has been driving towards is not simple gender parity but a cultural evolution and change that genuinely makes companies work better. As the report says in one of its conclusions:
‘Many of the challenges of diversity have shifted away from the structural issues of the past and are now more about the change in mindset and behaviour required by individuals in leadership positions, coupled with a mixed understanding of how to effectively execute some of the structural changes that research shows can move the needle’.
This is where the long value stretching into the future comes from. But there is far to go. The report quotes many an insight that illustrates this. One of the funniest, and therefore the saddest, came from an anonymous director:
‘I came to my first meeting with the then chairman [of the nominations committee] and with our executive search firm who was doing board searches. And after four or five minutes of discussion about candidates who were in a file that was given to us, I said, “Sorry, where is the other file?” And then they said, “What other file?” I said, “The file with women. We have just been talking about men. I imagine we are also looking at women.” And then it was a new ball game. I think that giving them firm directions in terms of what you want is very important.’
As the report says early on, the environment for boards these days has become ‘undeniably VUCA’, by which it means volatile, uncertain, complex and ambiguous. A solid read of this report will enable companies, their directors and their advisers, to make a better, easier and more profitable world in which to operate. And to bar the doors against politicians wishing to mess it all up.
