The Financial Case for Diversity: IoD’s Business & Ethnicity Summit

The Financial Case for Diversity - Dowshan Humzah

I was delighted to be a panellist at The Institute of Directors’ Business & Ethnicity summit on 19 November 2014. It explored why relatively few people from minority ethnic backgrounds make it to the top of British business and looked at policies and initiatives that could help broaden diversity across UK plc.

We had a couple of robust panel sessions covering ‘policy & politics’ and ‘business drivers’. A highlight for me was McKinsey presenting compelling analysis showing a statistically significant relationship between a more diverse leadership and better financial performance. This certainly reinforced the broadly accepted qualitative view that diversity is good for business

Challenges in Reaching the Top

Reaching the heights of corporate life or a senior level in most professions for minorities (be it women in leadership roles, ethnic groups, LGBT, those with different experiences and thinking styles, etc) can be quite challenging when factors other than academic achievement, professional qualification and ‘direct merit’ may be considered in what can be an opaque selection process with little data transparency to the outside world.

Success is not a direct result of a race between two fixed points or attaining the highest academic grades. Certainly, outside of ‘entry level’: cultural fit, personality, leadership traits, being liked and championed by executive management and the ‘softer skills’ are more crucial to selection and progression. However, these are often hard to clearly define and measure. And so, when thought and judgement are bought into the selection process we often see a divergence between application/consideration rates and appointment rates for minority groups in comparison to the general population.

What is the Current Situation for Ethnic Minorities?

Data from the UK Census 2011 and Race for Opportunity illustrates that from a UK working population of 40m, 12.8% are from a UK Black Asian Minority Ethnic background (BAME). We also know that approximately 20% of UK graduates are BAME. However, only 5% of senior managers and less than 1% of executive directors in the FTSE100 are BAME.

There is a close correlation between the issues for ethnic diversity with those of gender diversity and women in management. Of course, in time the situation should improve but it is the rate of improvement that is slow and concerning.

What is the Business/Financial Case for Diversity?

In an update to the UK Corporate Governance Code on 17 September 2014, the Financial Reporting Council (FRC) highlighted the importance of the board’s role in establishing the ‘tone from the top’ of the company in terms of its culture and values. In addition the FRC emphasised that dialogue which is both constructive and challenging is essential to the effective functioning of any board. One of the ways in which this ‘form of dialogue’ can be promoted is by having sufficient diversity on the board and in management teams.

It is generally accepted that having a broad range of opinions and styles leads to better decision making – and so, diverse executive and board composition in these respects (be it visible such as gender and race; or ‘unseen’ such as differences in background, experience and thinking style) should lead to greater economic value.

Vivian Hunt, Managing Partner – UK for McKinsey & Company presented compelling analysis showing a statistically significant relationship between a more diverse leadership and better financial performance.

The data set comprised of many hundreds of corporations from North America, Latin America and UK and correlated diversity (gender and race/ethnicity in leadership teams) with financial performance (average Earnings Before Interest and Tax (EBIT) for the period 2010-13). The size of the dataset provides confidence in the outcomes and has the rigour deeply associated with McKinsey.

The companies in the top quartile of gender diversity were 15% more likely to have above median financial returns, relative to their national industry median. Companies in the top quartile of racial/ethnic diversity were 30% likely to have above median returns. When broken down, most relevant for UK plc and our own Gross Domestic Product (GDP) was that companies with a 10% higher gender and racial/ethnic diversity on management teams and boards had EBIT that was 5.6% higher whilst in the US it was 1.1% higher.

A pertinent conclusion from McKinsey was the unequal performance across companies in the same industry and same country implies that diversity is a competitive differentiator that shifts market share. Equally, Vivian Hunt stated that “critical mass is required to drive decisions and impact”. For me, this further reinforces the need to build the talent pipeline and recruit and promote top talent on merit across the board as opposed to making ‘token appointments’, forcing quotas/targets or merely looking to reach targets via non-executives to support a better financial return.

Personally, I would like to take the McKinsey data one step further and apply it to the UK’s FTSE 350 and UK GDP – and calculate what the actual shareholder value, economic impact and ‘profit’ to UK plc would be. I am sure that will make more Board Chairs, CEOs, politicians and voters take notice.

What Can Be Done to Improve the Situation?

As mentioned, we had two strong panel sessions. The first focused on ‘Policy & Politics’ was chaired Lisa Buckingham, Senior Adviser Diversity, IoD and featured Sandra Kerr, CEO Race for Opportunity; Trevor Phillips, Chairman, National Equality Standard and myself. The second session focused on ‘Business Drivers’ was chaired by Anne Richards, Chief Investment Officer Aberdeen Asset Management and featured Ken Olisa, Chairman Restoration Partners and IoD board member; Vivian Hunt, Managing Partner McKinsey, Sarah Churchman, Head of Diversity, PwC and Melanie Eusebe, founder Black British Business Awards.

Many issues were raised and policies and initiatives debated at a high-level. There was broad agreement that a combination of factors – primarily of improving the environment, not though Government regulation but adoption of good practice and data transparency was essential. Whilst, as a panel we did not support quotas (as in Norway and some other markets) – the audience was broadly supportive of a ‘voluntary target’ reflective of the general population.

For me, I have always had a 7 point plan and will be pushing this harder:

  1. Simple Framework: Focus on ‘access to opportunity’ to ensure action to create a level playing field whilst covering the full range of minority groups.
  2. Clear Reporting: Ensure clear, transparent and real reporting covering external and internal appointments from applicants or short lists through to final appointment.
  3. Real Targets: If we are to set voluntary targets (NOT quotas) then we must set more appropriate targets e.g. the percentage of executive directors and senior leaders – providing accessible role models.
  4. Stronger Governance: Strengthen the FRC Corporate Governance Code to ensure that non-financial aspects such as employee, applicant and appointment data is available.
  5. Awareness Training: Ensure all involved in recruitment both as an industry and within all major organisations undergo ‘hidden bias’ awareness and training.
  6. Transparent Process: We must ensure recruitment processes are transparent and fair especially those for promotion or via internal appointment.
  7. Continue the Debate: Regularly re-examine the above 6 recommendations to make each of them more effective whilst debating my ‘no go’ areas: (e.g. quotas/Rooney Principle).

On a final note, I must make mention of Simon Walker, Director General IoD, and Lisa Buckingham for opening the summit and for ensuring that The IoD is at the forefront of the diversity agenda for UK plc. The IoD has hosted a broad range of events over the last two months supporting and celebrating diversity in its many forms. One of the organisations I represent, PRECIOUS (for black and ethnic minority women) had its 8th annual awards ceremony at The IoD on 22 October in the Nash Room – the same night that Lord Browne was speaking about the business imperative for diversity and inclusivity from an LGBT perspective in The Directors’ Room. More recently we saw The IoD host the Breaking the Mould awards celebrating organisations supporting women in management, followed by the Women in Business conference and now the Business & Ethnicity summit.

Written By Dowshan Humzah

Dowshan Humzah has delivered profitable business growth via product development, brand innovation and digital channel expansion for blue-chip companies across Financial Services, Internet, Telecoms, Media and FMCG as well as business start-ups. He shows how organisations can benefit from applying a ‘digital and social media lens’ across their core organisational objectives and then answer the ‘so what’ question in order to generate customer and financial value from digital tools. You can find him on LinkedIn and Google+

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