The drip feed of female board representation

“Many top businesses are still only paying lip service to improving the representation of women on boards… too many businesses remain trapped in permafrost…[and] the recruitment process remains shadowy and opaque” said Laura Carstensen launching an inquiry by the Equality and Human Rights Commission (EHRC) into board diversity in the FTSE 350. The inquiry warns of "inexcusable and unacceptable" variations in the progress for women on boards in the FTSE 350.

Background

In February 2011, Lord Davies published his first report, Women on Boards, about female representation at board level. This recommended that all chairmen of FTSE 350 companies should set out the percentage of women that they aim to have on their boards in 2013 and 2015 and that FTSE 100 boards should aim for a minimum of 25% female representation by 2015. Fast forward to October 2015 and Lord Davies published his five year summary showing the progress made. This found that women now made up 26.1% of FTSE 100 boards and 21.9% of FTSE 350 boards. This was lauded as being a significant achievement. But, the findings of an inquiry by the EHRC. "An inquiry into fairness, transparency and diversity in FTSE 350 board appointments", casts doubt on whether there genuinely have been the great strides forward on female participation that these figures would appear to show.

Levels of female participation

The EHRC found that there were still many FTSE 100 and FTSE 350 companies that fell below the 25% target. The inquiry also found that in some cases the proportion of female participation had increased by reducing the size of the board, rather than increasing the number of female appointments. Statistics gathered by the EHRC indicate that 31% of companies had increased female participation this way.

More striking, it found that the majority of women on boards were in non-executive roles; nearly three quarters of FTSE 100 and 90% of FTSE 250 companies had no female executive director in the period surveyed by the EHRC.

The report also found that only 6% of FTSE 350 companies have more than three women on their boards, but 96% have three men or more.

Our view

To be fair to Lord Davies, his original recommendations were not just about female non-executive representation, and included a focus on female executive directors and senior managers. While we hope that people will be readily convinced of the benefits of women on boards, strong pipelines of female senior managers and diversity (and not just male/female diversity) generally on their own merits, some recent developments seem to us likely to lead to a shift change:

• the recommendation by Lord Davies that all FTSE 350 boards should have 33% female representation by 2020
• the forthcoming introduction of gender pay gap reporting by large employers (see here elexica article for further details), and 
• the "Empowering Productivity" report by Jayne-Anne Gadhia, which made recommendations on reporting, executive accountability and linking remuneration to the achievement of gender equality goals (see here elexica article for further details).

We think that the mathematics of the 33% female board representation and the transparency of gender pay gap reporting will expose very publicly which companies are well advanced in developing their pipeline of female senior management talent and from which a greater number of female executive directors can be drawn.

The appointment process

A focus of the EHRC inquiry was into the way in which board appointments are made. Worryingly the EHRC found some practices which could be subject to challenge on the basis of both direct and indirect discrimination[1] if lacking the necessary objectivity.

Direct discrimination

The inquiry found that there were examples of companies engaging search firms and using quotas for the number of women on a long or shortlist. This type of positive discrimination is not permitted under the Equality Act 2010 and will amount to direct sex discrimination (against men) where better qualified male candidates are treated less favourably because of the quota.

Equally 40% of the role descriptions that were provided to the EHRC expressed a preference for candidates of a particular sex or age. Although this is not an absolute bar to the recruitment of anyone without the particular characteristic, case law has established that expressing a preference in this way can amount to direct discrimination.

In some companies, there was a risk of bias and discrimination during the interview process. This was because of a focus on “fit” and “chemistry” without any consideration of what objective criteria would actually lead to effectiveness as a board member. Equally, the inquiry found some instances women were asked questions (particularly those about work-life balance) which do not appear to have been raised with the male candidates. This type of stereotyping could in some circumstances lead to a direct discrimination claim.

Indirect sex discrimination

Some of the role descriptions obtained by the EHRC as part of the inquiry included a requirement that candidates had previous FTSE board experience. This could, according to the EHRC, amount to discrimination against candidates from groups that are under-represented on company boards as it is likely to disadvantage them as a group. From a legal perspective, a better way to ensure that the candidate is appropriate for the role would be to focus on the skills that are necessary.

Using personal networks alone, rather than advertising the role or using search firms, may also involve indirect discrimination as, according to the EHRC, it is likely that such networks will contain people with particular shared characteristics, thereby excluding a large proportion of the population.

Role of the nomination committee

The inquiry found that there was a small minority of companies where only the chair of the nomination committee and the company chair were involved in recruitment decisions. In the majority, though, the nomination committee had a significant role. The main criticism levelled, by the EHRC, at the nomination committee by the inquiry was a lack of women on nomination committee selection panels and a lack of training, particularly about avoiding unconscious bias.

Board evaluations

Under the UK Corporate Governance Code companies should carry out a formal and rigorous board evaluation on an annual basis. It is recommended that this considers, amongst other things, the diversity of the board. Despite this, the inquiry found that only 62% of FTSE 350 companies had carried out an evaluation of board effectiveness which took into account the gender composition of the board. Somewhat surprisingly, those companies that had not carried out a consideration of gender composition were more likely to be companies with women on their boards than with no women.

The EHRC has suggested that this may be because these companies feel that they are close to meeting the 25% target and stop considering gender composition. Whilst this would not, we think, be a universally held view, if true it would be of concern giving that the 25% figure was always designed to be a floor, rather than a ceiling, for female participation. There was also evidence that around 20% of companies had not undertaken a skills audit. The EHRC has recommended, therefore, that all companies should use a board evaluation to assess the skills, experience and knowledge of the board, as well as for diversity reasons.

Targets

Consistent with the Davies report, which recommended that all FTSE 350 should set targets for female participation, the EHRC inquiry report recommends that all companies should set aspirational targets for increasing the number of women at board and senior management levels. This also echoes the recommendations of the Gadhia report (Empowering Productivity) on the Financial Services sector which recommended the publication of this type of target.

Given the gender pay gap reporting duty, which will require publication of gender gap data by 2018, together with the number of reports and inquiries recommending targets and publication of associated data, it seems likely that companies will face significantly increased pressure to be transparent on their gender splits, particularly at senior management and board level.

Positive discrimination

The inquiry found that companies had little knowledge of the lawful positive action measures that they can take to encourage women to apply for roles or to help them compete for these.

In particular, under the Equality Act, where there are two or more candidates who are equally qualified and one of these is from an under-represented group (where this group shares a protected characteristic), the employer can elect to appoint the candidate from the under-represented group. The difficulty with this provision is that there is often uncertainty around whether candidates are equally qualified, which is likely to be, in part, a reason why it is relatively under-utilised.

What should organisations be doing now?

The EHRC inquiry has highlighted a number of practices that are of concern in relation to the appointment of board members, including some that would amount to unlawful discrimination. Organisations should review their processes to ensure that they are fit for purpose and that, to the extent possible, any possibility for unlawful discrimination is eradicated from them.

EHRC recommendations

The main recommendations arising from the inquiry are that:

• Companies should use board evaluations to assess the skills, experience and knowledge of the board and to obtain information about the diversity of the board members.
• Companies should create a diversity policy for the board and senior management based on each company’s specific diversity needs, with aspirational targets tailored to each company. Companies should report annually about their progress in meeting their targets.
• Companies should have appropriate (non-discriminatory) role descriptions that set out objective and justifiable skills, experience, knowledge and personal qualities needed for the role.
• Companies should use transparent and inclusive search processes, by using search firms that can demonstrate their effectiveness in improving diversity in appointments, carefully considering their instructions to these firms to avoid discrimination, advertising through appropriate channels unless there is a good reason not to and avoiding relying solely on personal networks to source candidates.
• Companies should select candidates for board positions by using objective criteria that are relevant to the role description and should avoid asking questions about factors that are irrelevant to the role. Those involved in the selection process should discuss their assessment to ensure consistency and to reduce any bias.
• Rather than using “chemistry” and “fit” as criteria for a role, companies should seek to define what skills, knowledge, experience and personal qualities would be appropriate and assess candidates against these.
• The nomination committee should be involved in the appointments process, along with the company chair. Selection committees should be diverse and appropriate training should be given to those involved in the selection process, including unconscious bias training.

The EHRC recommendations bear careful review.

[1] The protected characteristics under the Equality Act are: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation.