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Proxy Governance Update: Ethnic Diversity – What has the Parker Review delivered?

Is UK plc ready to embrace the ambitions of the Parker Review?

Our previous update last month captured the developments Boudicca witnessed in the field of Executive Remuneration regarding the resurgence of Restricted Share Plans as a means of remunerating employees. As the proxy season progresses at its usual frantic pace, we are observing investors and proxy advisers applying stricter policies in relation to a host of notable areas they forewarned of at the start of the year, in particular remuneration in the context of COVID-19.

In this update, we are looking at ethnic diversity at Board level, focussing on the background and aims of the Parker Review, and investor and proxy adviser policies and sentiment towards this. We will also explore examples where we are seeing ethnic diversity reported and conclude with our advice on key areas to consider through Board succession planning, implementation and reporting.

In our next monthly update, we are looking forward to updating you with our Mid-Season AGM review, which will cover early highlights and emerging themes of the year.

 


Notable Highlights:

  • Ethnic diversity –explanation of the background and key findings of the Parker Review.
  • Market views on the Parker Review – an analysis of proxy adviser and investors’ policies.
  • Considerations for issuers – reporting on the Parker Review in the Annual Report.

 


For some companies, Diversity and Inclusion (D&I) has been a talking point for years, but we are firmly at the stage where shareholders, stakeholders and wider society expects to see companies follow through with meaningful action. Committee led reviews with recommended diversity targets have been a purposeful driver for change on Board diversity at FTSE companies. Here, we assess one of the more recent reviews ‘The Parker Review’.

We pose the following key questions

  • What is the Parker Review?
  • How are proxy advisers and investors responding to the Parker Review recommendations?
  • What do companies need to take into consideration when reporting on the Parker targets?
  • Is meeting the Parker Review recommendations enough?

 

The Parker Review

To discuss the Parker Review, we should firstly recall the preceding and parallel drive to increase gender diversity on company Boards through recommended targets. The Davies Review 2011 – 2015, of which Sir Parker was a member, took some time to gain traction with companies in the FTSE100, yet they achieved the target of 25% female representation within the five years they set themselves. Progressing from the Davies Review came the Hampton-Alexander Review 2016-2020, which set a target of 33% representation of women on FTSE 350 Boards and in Executive Committee and Direct Reports by the end of 2020. At their outset these reviews set out an ambitious target for UK companies to strive towards and eventually, they developed into best practice.

In 2017, commissioned by the UK government, Sir John Parker and the Parker Review Committee published ‘The Parker Review: A report into the ethnic diversity of UK Boards’. The Parker Review recommendations set a target for each FTSE 100 Board to have at least one director of colour by the end of 2021, and for each FTSE 250 Board to have the same by 2024.[1]

The Committee’s business case, underpinning the ethnic diversity targets, was to ensure boards are better aligned to their customer base, and to recognise that the future recruitment of talent will be significantly influenced by the demographic changes taking place now and in the future in the UK and overseas. Increasing ethnic diversity on boards not only ensures that a company’s leadership more accurately represents its workforce and wider stakeholders, but also reflects that progress is being made generally toward equality and inclusivity.

 

Reviewing progress

At the time the Review began, 53 of the top 100 companies did not have a single director from an ethnic minority background. On 12 March 2021, the Parker Review committee published its latest survey of FTSE 100 companies:

  • 74 FTSE 100 companies had ethnic representation on their boards (Nov 2020), compared to 52 in January 2020
  • 21 FTSE 100 companies had no ethnic representation on their boards (Nov 2020) (Plus, three no responses and two unable to provide information)
  • By March 2021, a further seven FTSE 100 companies reported that they had appointed a director from a minority ethnic group, increasing the total to 81/100
  • 3 FTSE 100 companies did not respond to the survey
  • FTSE 250 companies will be surveyed by the end of 2021 and have until 2024 to appoint at least one ethnic minority director on their boards

Commenting on the survey results, Sir John Parker said: “This survey of FTSE 100 companies represents significant progress towards the target… We would hope the remaining companies in the FTSE 100, who still have time to meet the target, will ensure they follow this encouraging lead and align with the business case that underpins the review”.

It is evident that progress has been made by the FTSE 100, despite the COVID-19 pandemic affecting board recruitment processes. Whilst we should praise the encouraging progress that has been made, we must not ignore that improvement continues to be needed. The pandemic has disproportionately affected ethnic minorities, and there is an expectation on companies for a strong commitment to diversity and addressing the issues faced by these minorities. Moreover, companies that are not yet in compliance with the Parker Review need to be aware that this will be flagged in the next proxy season.

 

Proxy advisers’ policies on Ethnic Diversity

The table below displays the 2021 policies being adopted by the four main proxy advisers as they review their recommendations to their subscribers when determining voting support for companies on their compliance with expectations on Board diversity.

Whilst ISS has no explicit statement on the Parker Review in its 2021 policy, it is expected that, as was the case with the Hampton-Alexander target, ISS will allow companies a transition period for implementation of the Review target. In next year’s guidelines, we will likely see ISS adopt a new policy related to board ethnic diversity.

[1] https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/news/2020/02/ey-parker-review-2017-report-final.pdf

Table 1: Proxy advisers’ views

Proxy Adviser2021 Policy on Ethnic Diversity
 FTSE 100 constituentsFTSE 250 constituents
ISSNo statement (2021 Policy link)
Glass LewisFTSE 350 companies should provide meaningful disclosure regarding their performance against the board ethnic diversity targets set in the Parker Review. (2021 Policy link)
Investment AssociationBeginning in 2021, IVIS will Amber Top the Corporate Governance Report for any FTSE 350 companies that do not disclose either the ethnic diversity of their board or the credible action plan it has in place to achieve the Parker Review targets. (2021 Policy link)
PIRC

 

Each FTSE 100 Board have at least one director from an ethnic minority background by 2021Each FTSE 250 Board to have at least one director from an ethnic minority background by 2024
PIRC will recommend abstaining on the re-election of a Nomination Committee Chair of a FTSE 350 company where there is no disclosure either of: Ethnic diversity of their Board; Credible action plan to achieve the Parker Review targets/ or it discloses why the target does not apply.

Institutional voting policies on Ethnic Diversity

The 2021 proxy season has seen heightened investor support of the Hampton-Alexander review, as a lack of sufficient gender diversity has been a key driver for votes against board members, specifically the Chair of the Nominations Committee. Though the Parker Review is not yet translating into voting behaviour at AGMs, many investors are expecting more robust disclosure on diversity and have included ethnic diversity expectations into their proxy voting guidelines for 2021. In 2022, we expect FTSE 100 companies will experience some degree of shareholder dissent if the Parker Review target is not met.

In October 2020, Legal & General warned FTSE 100 companies with all-white boards that it would vote against those that fail to hire an ethnic minority director by 2022. With gender diversity in 2018, Legal & General was one of the first large investors to take an aggressive stance on voting against Chairs of companies where women were underrepresented. Much as is the case with gender diversity, issuers should expect that meeting ethnic diversity expectations will become a necessity if the company wishes to avoid shareholder dissent.

Table 2 below looks at a few of the Top 10 institutional investors and their policies on ethnic diversity.

Table 2: Top institutional investors view

Investor
Disclosure Required
Voting Policy
BlackRockCompanies should, to the extent permitted by law, provide demographic details for each director / candidate and disclose how diversity (covering demographic factors including gender, ethnicity, and age; as well as professional characteristics, such as a director’s industry, area of expertise, and geographic location) has been accounted for within the proposed board composition. (p6.  BlackRock Investment Stewardship)Nothing stated in 2021 policy.
Legal & GeneralWe expect all companies to disclose a breakdown of board directors, executive directors, managers and employees by geography, main skill set, gender and ethnicity, along with the information on its gender pay gap, ethnicity pay gap and what initiatives it has in place and action the company is taking to close any stated gap (p7.  Corporate governance and responsible investing policy)In line with the Parker Review, we expect FTSE 100 companies to have at least one board member from an ethnic minority background and will start to apply voting sanctions from 2022 on boards that do not have this minimum requirement. Smaller companies are also encouraged to consider the Parker Review findings when refreshing their boards. (p8. Corporate governance and responsible investing policy)
Vanguard Group The expectation is that public boards consider board diversity and disclose the diversity of their boards on factors such as gender, age, race, ethnicity and national origin, at least on an aggregate basis (p7.  Summary of the proxy voting policy for UK and European portfolio companies)Nothing stated in 2021 policy.
State Street Global AdvisorsIn 2021, as this is the first year for this new policy, SSGA do accept FTSE 100 company disclosures around them meeting the Parker Review recommendations.In 2021, we will vote against the Chair of the Nominating & Governance Committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their boards. (p2,  Summary of Material Changes to State Street Global Advisors’ 2021 Proxy Voting and Engagement Guidelines).                                                                                                        Starting in the 2022 proxy season, if a company in the S&P 500 or FTSE 100 does not have at least one director from an underrepresented community, we will vote against the Chair of the Nominating & Governance Committee. (p3.  Guidance on Enhancing Racial & Ethnic Diversity Disclosures

 

Considerations for companies reporting on the Parker Review

As expected, there are disparities in terms of how companies in the FTSE 100 Index are reporting on the Parker Review. Reporting ranges from companies solely acknowledging an awareness of the Parker Review, to much better examples where it is mentioned several times throughout the Annual Report as part of the wider description of the company’s (D&I) initiatives. We note the following statement from the April 2017 report issued by the  Business, Energy and Industrial Strategy Committee on Corporate Governance Reform  “The detailed narrative of board diversity in annual reports should be a working document throughout the year, informing the board, the Nomination Committee, middle and senior managers, and the workforce and other stakeholders, about the seriousness that companies are taking diversity and succession issues. The revised Code should make this requirement explicit.”

It is important that companies articulate goals and strategies related to racial and ethnic representation at the board level. This applies both to those that have made strides in addressing the ethnic diversity imbalance, and more specifically to those that are yet to begin their journey towards greater racial and ethnic diversity. The focus must also encapsulate how they can improve their alignment with investors’ expectation for effective disclosures, focusing on how the board reflects the diversity of the company’s workforce, community, customers and other key stakeholders. The Parker Review noted the example of Lloyds Banking Group in 2018, amongst others, and in that context we reviewed their reporting again for 2020. We consider this a good example of reporting on the Parker Review:

“The Group has also set a target of 13 per cent of senior roles to be held by Black, Asian and Minority Ethnic executives by 2025. The Board currently meets, and will aim to continue to meet, the objectives of the Parker review with at least one Black, Asian and Minority Ethnic Board member. The Board places high emphasis on ensuring the development of diversity in senior management roles within the Group and supports and oversees the Group’s ambition of achieving 50 per cent of senior roles held by female executives by 2025, and of 13 per cent of senior roles held by Black, Asian and Minority Ethnic executives by 2025. This is underpinned by a range of policies within the Group to help provide mentoring and development opportunities for female and Black, Asian and Minority Ethnic executives and to ensure unbiased career progression opportunities. Progress on this objective is monitored by the Board and built into its assessment of executive performance… The Group also launched its Race Action plan during 2020, which aims to drive cultural change, recruitment and progression across the Group, including a new public goal to increase Black representation in senior roles from 0.6 per cent to at least 3 per cent by 2025, aligning the Group with the overall UK labour market.”

 

Looking beyond the Parker Review

It is crucial that companies do not fall into a complacent “one and done” mentality. Companies must show they are not aiming for compliance with the Review through fear of investor backlash, but rather that they are striving for systemic change within the business to promote D&I throughout, as is exemplified by the above extract.

While many companies share D&I materials that are oriented toward prospective employees, there is less content about how D&I helps to advance a firm’s long-term strategy, or the goals that help them measure progress along the way. Additionally, there is an expectation of a description of how the board executes its oversight role in D&I.

 

Conclusion

Following our investigation of the topic and our findings, we share our conclusions and discuss potential next steps for businesses to take to adopt the review findings and accelerate their progress on ensuring diversity within their leadership and board roles.

As it stands, the extent to which the ethnic diversity recommendation of the Parker Review has been assimilated within the companies listed in the FTSE 100 Index is encouraging considering the survey results reported above. Research suggests that the target set by the Review is achievable. Below are our recommendations for improving the ethnic diversity on Boards and in Executive roles.

We would suggest that companies consider in depth reporting on the levels of ethnic diversity within their respective organisations:

  To think about how you will be reporting on this as a component of the FTSE 100 Index; the Parker Review calls for there to be ‘one by 2021’:

  • Undertake an in-depth measurement of your internal diversity statistics and of external disclosures in the marketplace, both to understand the diversity ratio of your Board and leadership team and also to benchmark these against your peers;
  • Identify and engage with relevant diversity organisations strategically to connect with diverse talent. Also invest in partnering with global executive search firms who are connected to D&I membership organisations.

Members of the FTSE 250 Index are advised to learn from the FTSE 100 issuers regarding Annual Report disclosures for meeting the target set for 2021 and to start to plan how to meet the target ideally before 2024. It is advised that those with oversight responsibilities engage in upgrading the company’s respective succession and implementation planning towards this objective (there is a detailed and broad-ranging toolkit for companies and those responsible for recruitment, to help implement many of the recommendations contained in the report).

Integrate into Board Committees agendas and carry out horizon scanning to include:

  • Setting leadership diversity targets – invest in targeted programmes for high-performing BME talent – but be careful to ensure that these are properly applied and managed;
  • More generally, integrate awareness and commitment to D&I into the culture and business practices across your organisation, and measure the impacts on an ongoing basis.

The overarching message we would like to end on is that companies who lack diversity need to actively break the cycle. Addressing the lack of diversity will require a concerted effort from the top down within all organisations notwithstanding whether they are in the public or private sector. For companies within the FTSE100 that are yet to meet the Parker Review target, we recommend Board time be allocated to reflect on the reasons for this and consider how comfortable they will feel in explaining non-attainment of the target at the end of 2021. The rationale for appointing people based on merit should not be used to justify a lack of diversity on Boards. The 2020 Update Report from the Parker Review states this very clearly as follows ‘Meritocracy is not the opposite of diversity – both priorities should go hand in hand. Discouragingly, we observed that many instances of reporting classed as ‘some’ or ‘more’ on Board diversity policies associated their commitment to diversity (including ethnic diversity) with a reassurance that this would be implemented without compromising on merit. We suggest that this common conflation of diversity with reassurance of merit is an indicator of subtle bias that associates diversifying Boards with ‘lowering the bar’.’

We hope this article has given you food for thought in this developing area. If you would like to understand more about this topic, or the policies of proxy advisers or your investors, please contact our Corporate Governance Advisory team.