DEI initiatives for leaders: Seeing value, addressing obstacles

Board and executive diversity continue to be a top priority for many corporate directors and investors as diversity, equity, and inclusion (DEI) initiatives have been linked to improved company performance.

Underscored by the European Parliament's move to set new gender balance targets for boards and by younger workers saying DEI is a priority in their choice of employer, an emphasis on diversity in boards and leadership continues.

However, resistance to DEI initiatives remains. In particular, male corporate directors don't share the same enthusiasm as others about DEI's importance.

McKinsey research found that companies with diversity in senior leadership roles outperform companies with less diversity in executive teams.

Companies with more than 30% of executives who are women were more likely to outperform companies where the percentage ranged from 10% to 30%, the study said. "In the case of ethnic and cultural diversity … in 2019, top-quartile companies outperformed those in the fourth [quartile] by 36% in profitability."

Research from employment-focused websites Indeed and Glassdoor found that 72% of workers ages 18–34 said they would consider turning down a job offer or leaving a company if they did not think their manager supported DEI initiatives.

While diversity plays an important role in metrics and company culture, many organisations fail to extend robust DEI initiatives to senior leadership roles. Data from PwC and Cranfield University research teams found areas where progress is lacking across the US and the UK.

DEI efforts continue to face criticism

PwC's 2022 Annual Corporate Directors Survey found that board diversity has been a key focus area for both investors and directors in the US for years, and 64% of directors say increasing board diversity can improve stakeholder trust.

Among directors, PwC's survey identified gender as the most commonly cited response when asked what is important to create diversity of thought (88%), followed by race and ethnicity (83%) and age (79%).

"The percentage of directors who think diversity of socio-economic background is important has increased significantly since 2019, from 39% to 58%," the report said.

More than nine out of 10 directors (93%) say that diversity brings unique perspectives to the boardroom, the report said. While a majority of directors also see benefits, such as improving relationships with investors, some do not see the value in DEI initiatives.

The survey found that while board diversity has increased, the percentage of directors who agree with the benefits of DEI has declined since 2019.

"Directors are quite a bit more likely to say that efforts to diversify boards results in unneeded candidates (34%, up from 27%)," the report said. "Almost one-third of directors (31%) say that the push for diversity is resulting in unqualified candidates — up from just 23% three years ago."

Male directors are more likely to question elements of board diversity, with 64% saying these initiatives are driven by political correctness and 61% saying that shareholders are too preoccupied with the topic — compared with 29% and 30%, respectively, of female directors, the report said.

The report found that female directors are more likely to support diversity and inclusion metrics — 73% compared with 45% of male directors.

The number of directors who feel that DEI initiatives are driven by political correctness has increased six percentage points since the 2021 survey, while the percentage of directors who say diversity brings unique perspectives to the boardroom remains the same as last year's figure.

Barriers remain in the UK

While the European Parliament continues to take steps towards gender equality across board positions, the UK has a long way to go to make board diversity a reality.

There are 47 women holding executive directorships in FTSE 250 companies for the third year running, according to The Female FTSE Board Report, conducted by Cranfield University.

"The continued lack of progress in the appointment of female [executive directors] in FTSE companies suggests the processes that shape executive-level appointments may be the root cause of the current situation and changes to which are fundamental to its improvement," the report said.

Recommendations from the report to improve the gender balance across boards align with the findings from the Women Count 2022 report titled The Role, Value, and Number of Female Executives in the FTSE 350. Both reports conclude that the role of the CEO should include implementing policies with the purpose of achieving gender balance across senior positions.

More women are needed in critical roles such as chair and CEO — the roles least populated by women — in order to increase the number of women in executive positions, the Cranfield board report said.

Other recommendations from the report include the integration of board evaluation consultants to manage executive succession in order to ensure that boards and companies are "gender-proofing the process", and the need for investors to demand more progress in this area.

Research commissioned by the UK's Financial Reporting Council and conducted by Cranfield University and Delta Alpha Psi Services looks at the "challenges and opportunities Black and minority ethnic individuals may experience in progressing to the boards of FTSE 100 and FTSE 250 companies".

The report recommends that listed companies analyse the data on the diversity and demographic makeup of their boards. "This analysis should be used to justify, where required, their intentional, positive action recruitment, succession planning, and talent mapping initiatives that bring the right technical skills, coupled with the required level of diversity to increase ethnic minority representation at board level," the report said.

— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.