UK board directors value diversity of thought above gender, age and ethnicity, study finds

Aug 05, 2021
Gender diversity can lead to improve EBIDTA and one-year stock returns, according to the Financial Reporting Council

Increasing gender diversity has proven to be beneficial for FTSE companies, but when asked about the most important aspect of diversity, FTSE-listed board directors value personality and neurodiversity above all else, according to a new report by the Financial Reporting Council (FRC).

When asked to define what board diversity means to them, 86 percent of FTSE 350 directors surveyed say personality and neurodiversity, followed by gender and ethnicity (both mentioned by 73 percent of respondents). Almost two thirds of respondents cite functional backgrounds and age as part of their definition of diversity.

But when asked about the aspects of board diversity that are most important to board effectiveness, one third (34 percent) cite personality and neurodiversity, while 24 percent of directors believe skills and experience are an important aspect of diversity. Only 6 percent of directors mention either gender or ethnicity.

‘Taken together, these results suggest that diversity is clearly valued by FTSE-listed company directors,’ the report authors note. ‘However, the diversity that they value most is individual differences, such as personality and neurodiversity. Demographic diversity is neither seen as a threat to board effectiveness, nor does it appear to be seen as a primary means to achieve the type of diversity that leads to greater board effectiveness.’

Gender diversity benefits FTSE-listed companies

Even though the representation of women on FTSE 350 boards has risen from 4 percent in 1996 to 36 percent in 2020 – according to the London Business School Leadership Institute report, which the FRC quotes – the number of women in executive roles is lagging behind. Female representation in executive roles has only increased from 1 percent in 1996 to 3 percent in 2020. 

The FRC says that almost all FTSE 350 companies have benefited from increasing gender diversity. FTSE 350 companies with at least one woman on the board, on average, will have a 3 to 5 percentage point higher EBITDA margin over the next four years. The FRC says that an analysis of FTSE 250 companies also reveals that having at least one woman on the board has a statistically significant positive effect on one-year stock returns. 

However, the report authors note that when more than one diverse board director is added, the board itself may require a change in its culture to accommodate the new perspectives and get the maximum value from the diverse perspectives represented.

Efforts to improve ethnic diversity at early stages

In 2020, directors from ethnic minorities represented about 7 percent, according to an ICSA report which was quoted by FRC. In 2017, 53 out of the FTSE 100 companies did not have any non-white directors but by March 2021 that number was down to just 14. 

The FRC explains that FTSE 350 companies set targets to meet, which are outlined in Parker Review, but in 2020, 59 percent did not meet the target of having at least one director from an ethnic minority background on their boards.

Ethnic minorities have been so underrepresented historically on FTSE boards that the FRC could not examine the effects of ethnic diversity on boardroom dynamics the same way as gender diversity because there isn’t enough data to call on.

‘In the interviews, there was a broad recognition that the aim of achieving ethnic diversity is still, for many organisations, in its early stages of being realised,’ the report authors note.

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