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Do boardrooms still have a glass ceiling?

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This week, an editorial in the Financial Times argued that “celebrations over corporate Britain’s moderate success at increasing gender diversity in the boardroom have been premature.” Whilst more than half of board appointments in the last twelve months in FTSE 350 companies have been women (exceeding a target for 30% of such roles to be filled by women candidates), there still exists a significant gender pay gap for board members of the same companies. FTSE 100 companies reported as high as a 40% pay gap on corporate boards. Perhaps not surprisingly, the gap in earnings grows wider the higher up the corporate structure you go. It appears that men and women working in the City, and indeed financial centres worldwide, are on completely different pay trajectories: trajectories which diverge and become ever-more distant from each other as careers progress.

As the FT points out, this represents “statistical evidence of a glass ceiling.” The danger is that such a structure has the result of disincentivising success, potentially stifling the ambition of some of the country’s most able professionals. Many argue that it is also self-defeating. Particularly given the effects of globalisation, which has meant many financial institutions now serve an ever-more diverse range of clients around the world, many corporations are finding that they require greater diversity in decision-making to be able to service a greater scope of requirements. Those that achieve this often end up making more money. As Yilmaz Arguden noted in the Harvard Business Review back in 2012, FTSE boards on which women made up over 20% of members had better operational performance, and higher share prices, than those with lower representation. She also argued that:

“Diversity on boards is critical to sustaining performance. Broadening the composition of the board increases the size of the candidate pool and, more importantly, helps expand perspectives at the top. […]

“There are several benefits to appointing more women on boards. When Fortune-500 companies were ranked by the number of women directors on their boards, those in the highest quartile in 2009 reported a 42% greater return on sales and a 53% return on equity than the rest.

“Experts believe that companies with women directors deal more effectively with risk. Not only do they better address the concerns of customers, employees, shareholders, and the local community, but also, they tend to focus on long-term priorities. Women directors are likely to be more in tune with women’s needs than men, which helps develop successful products and services. After all, women drive 70% of purchase decisions by consumers in the European Union and 80% of them in the United States.”

The “glass ceiling” is not the only deterrent for women reaching the top – it is also the practicalities of family life: which women, more so than men, are expected to prioritise over their careers. But is this a choice that still needs to be made? As the world and business slowly returns to normal following the disruption of the Covid-19 pandemic, there are greater demands for more hybrid working patterns. Working from home, for at least part of the week, could become the norm. Many argue that this could increase productivity: Bloomberg’s Libby Cherry found that working one day at home per week would lift US productivity by 4.8% and that happier workers close more sales. Hybrid working could, in addition, help boost diversity on corporate boards. As the pandemic showed, with businesses around the world forced to rely on Zoom for meetings, there is no reason why female board members – who are more likely to require some time at home owing to childcare commitments – should not be able to dial-in from outside the physical boardroom. Greater flexibility in juggling family responsibilities and career goals, a problem which has arguably deterred many women from advancing to the highest positions, and could facilitate greater gender diversity on boards.

This same principle could improve not only gender diversity, but religious, ethnic and geographical diversity as well. Again, there is no reason why board members could not dial-in to a board meeting in London from Lagos, Islamabad, Dhaka or Cairo. The Zoom era, enforced on us by the pandemic, has eliminated geographical borders and reduced – though not erased – the need for physical travel. Boards which adopt a more flexible model along these lines will likely find that their decision-making benefits from a greater range of experiences and thinking – improving the service they can offer to their clients and therefore, ultimately, their bottom-line.

Of course, demographic diversity is not the only kind of diversity that is important: boards should aim for a healthy mix of people with a wide range of different backgrounds, who are able to offer unique and valuable perspectives. A mix of professional as well as personal backgrounds is important; financial institutions have arguably become too narrowly focused in appointing solely those who have taken the industry’s conventional career path. Many boards recruit for members within the limited pool of current or former CEOs and CFOs – creating the risk that board members come to share the same experiences, skillsets and thought processes. Encouraging genuine diversity of thought – which demographic diversity undoubtedly plays a role in – is crucial in creating an open and inventive workplace. After all, as Columbia Professor Katherine W. Phillips found, diversity “often comes with more cognitive processing and more exchange of information and more perceptions of conflict.” Boards that are diverse in gender, race, age, backgrounds and skillsets are, drawing on their different experiences, likely to come up with more creative ideas and foster more innovative working environments.

In the UK, the Financial Conduct Authority (FCA) has recognised this and is attempting to take action. Under new measures announced in July, London-listed companies will have to “comply or explain” if they fail to meet diversity targets. In August, regulators in the US brought forward similar measures for companies trading on the Nasdaq. With ESG principles gaining ever-greater prominence, companies who fail to improve diversity may well be forced to by activist shareholders: as we have reported, shareholders have been increasingly succeeding in enforcing climate goals – so why not diversity targets as well?

As the FT rightly pointed out this week, barriers still exist for improving gender diversity at the top of this country’s corporations. Wider diversity also requires improvement. As business gradually returns to normal following the pandemic, plenty of opportunities are open for improving diversity. Those that take them will likely find their decision-making, services, and profitability improve.

Author: Harry Clynch

#ESG #Diversity #GenderPayGap #GlassCeiling #HybridWorking #FCA #Nasdaq