Diversity matters

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The outcome of the general election may be anything but certain. It is clear, however, that diversity will become increasingly important for business whatever the complexion of the incoming government.

This year is, of course, ‘the zero hour’ for Lord Davies’s target that there should be 25 per cent of women in the boardrooms of FTSE 100 companies. It is almost certain this goal will be met – effectively doubling the female representation among FTSE 100 main board directors since 2011 when Lord Davies carried out his initial review into gender diversity and laid down his recommendations.

It will not, however, be a question of handshakes all round with a tick in the box, confident that the entire diversity issue is now done and dusted. Whichever party wins the election wants corporate Britain to work towards boardroom targets for the representation of black, Asian and minority ethnic directors [BAME].

The Labour Party has asked Lord Davies to try to do for the BAME community what he appears to have achieved for women. Vince Cable, the business secretary, also recently kicked off a process which is designed to survive the election. A steering group, chaired by Sir John Parker, chairman of Anglo American, will look into how a broad goal can be achieved whereby Britain no longer has any monocultural boards by 2020.

In addition, and championed by the redoubtable campaigner, Dr Ros Altmann, the issue of allowing older workers to continue in employment beyond traditional retirement dates is likely to become more prominent. As I have said before, it is no use simply drafting in a few token women, minorities or older people and expecting performance to improve.

However, before embarking on a radical change programme which would overhaul the entire culture of a business, most senior executives need to be convinced that there’s going to be something more substantive at the end than the rosy glow of feeling that they have done the right thing.

That’s why new research from the consultancy group, McKinsey, into the financial impacts of diversity – revealed at a joint IoD/Aberdeen Asset Management business and ethnicity summit late last year – was so very important.

The study, which looked at 366 sizeable companies in North America, the UK and Latin America, revealed that organisations in the top quartile for gender diversity produced earnings before interest and tax (EBIT) that were 15 per cent higher than the median of their national industry group. The outperformance from racial/ethnic diversity was even more striking.

Companies in the top quartile on this measure were an amazing 30 per cent more likely to have above-median earnings. The performance differential was not only on the upside – there was a ‘non-diversity’ penalty whereby companies in the bottom quartile for both gender and ethnic diversity significantly underperformed in all the other three quartiles. In addition, McKinsey’s research calculates that for every 10 per cent increase in gender diversity in a company’s senior executive team or in the boardroom there is a 3.5 per cent rise in EBIT.*

The prospect of even a small fraction of such gains should be enough to persuade most companies to invest in establishing a diversity pipeline. And, with the prospect that the whole of UK plc could move up a notch in terms of international competitiveness, it is little wonder that politicians are so keen to drive the diversity agenda.

* Lisa Buckingham will give more detail on McKinsey’s research in the next issue of Big Picture, published in early March www.iod.com/bigpicture

About author

Lisa Buckingham

Lisa Buckingham

Lisa Buckingham advises the IoD on policies and initiatives to promote greater diversity in business. She previously spent 30 years in financial journalism, including as City Editor of the Guardian and the Mail on Sunday. Lisa is a fellow of the Royal Society for Arts and was awarded an OBE for services to journalism and women's issues in 2010.

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