When Sainsbury’s then chairman, David Tyler, started walking the grocery chain’s shop floors in 2009 after his appointment to the board, he noticed a worrying trend.
Despite having hired an ethnically diverse workforce that often reflected the population they served, Sainsbury’s store managers were, in most cases, all white men. “And it wasn’t just me that was concerned about it. Naturally, the executive management were concerned as well,” Tyler says.
It sparked a series of initiatives, including management development schemes, unconscious bias training and recruitment programmes, which also focused on senior leadership, resulting in Sainsbury’s appointing the first black woman – Jean Tomlin – to its board in 2013.
By the time he stepped down in 2019, Tyler felt they had made a difference. “It’s much easier for, say, a young woman from an ethnic minority arriving in one of our stores to see that it’s possible for her to get to the top today than it was then. And that’s really important, as far as I’m concerned.”
It is one of the reasons that Tyler, who now chairs the government-backed Parker review into ethnic diversity, has broadly welcomed new regulations that will, for the first time, force the UK’s roughly 1,100 publicly listed companies to show that they are meeting gender and ethnic diversity targets – or explain why they are falling behind.
The Financial Conduct Authority (FCA)’s “comply or explain” rules will mean that, from this year, companies listed on the London Stock Exchange will have to disclose progress towards key benchmarks in their annual reports. The benchmarks include whether women make up at least 40% of the board; whether they hold any of the most senior roles (chair, chief executive, chief financial officer, or senior independent director); and whether at least one member of the board is from an ethnic minority.
Beyond creating more equal opportunities, the targets have also been set with shareholders in mind. The Investment Association, which represents firms managing more than £10tn in assets, has long argued that more diverse leadership teams help companies avoid groupthink and make better long-term decisions that benefit investors and savers. “Several studies have demonstrated that a good level of diversity can improve business decision-making, minimise risks, improve the sustainability of profit growth and therefore maximise long-term returns,” says Michael Marks, head of investment stewardship at Legal & General Investment Management.
The new rules are the closest UK regulators have come to imposing controversial quotas, which some critics claim can be detrimental to employees if their presence is viewed by colleagues as mere tokenism. But the FCA is still moving cautiously: companies are only expected to explain why they might be falling short, and are unlikely to face fines, or the threat of having shares suspended, if they fail to comply.
Crucially, according to some business leaders, the regulator is not asking much more from companies than what existing voluntary schemes demand.
The Parker review that Tyler chairs, for example, set a target for every FTSE 100 company to have at least one board director from a minority ethnic background by December 2021 – which 97% of companies achieved – and for the same target to be met by FTSE 250 members by 2024.
Gender diversity programmes have had an even longer run, with three consecutive government-backed schemes having pushed the proportion of women holding boardroom roles across FTSE 350 companies from 9.5% in 2011 to 37.6% in 2021. Progress in the blue chip FTSE 100 alone placed the UK second only to France, where there are mandatory quotas for gender representation.
Denise Wilson, chief executive of the FTSE Women Leaders review, says she does not want the FCA’s rules to “push the dial” beyond voluntary schemes’ targets. While it might mean progress is slower, Wilson says businesses respond far better to carrots than sticks, and want the opportunity to cheer their own successes rather than be punished if they fail. She says voluntary schemes have ensured a deeper cultural shift around diversity, and avoided making it a mere “tick-box exercise”.
Nonetheless, the scope of the FCA’s rules will still stretch the British corporate sector, by requiring nearly three times the number of companies currently included in the Parker and gender reviews to report diversity data. This will make it easier for asset managers to put pressure on firms still lagging behind, and set a benchmark for similar disclosure from companies they invest in abroad.
But investors are hoping for more data beyond the boardroom. “We have made good progress on board-level diversity but this has not yet flowed through to senior management levels, which is key to the most holistic change across an organisation,” says Nathan Leclercq, head of corporate governance at Aviva Investors.
Wilson’s gender diversity review has already been expanded to track changes in executive and senior management roles, and Tyler has hinted that the Parker review could soon do the same.
Others are hoping for greater progress on other fronts, including socio-economic diversity. “Social mobility is perhaps the golden thread that runs through everything,” says Catherine McGuinness, who chairs the City’s socioeconomic diversity taskforce. “But also, if you happen to be a woman from a lower socioeconomic background and an ethnic minority background, you really do have the cards stacked against you. So there are compounding issues here.”
The FCA has said it will keep an eye on the costs and potential burdens placed on companies, but is not ruling out making changes when it reviews the policy in three years’ time.