By Natacha Dimitrijevic
As well as gender, diversity encompasses nationality, ethnicity, religion, cultural background, education, personality differences, experience and skill-sets.
In our engagement with companies, we have called in particular for greater diversity on boards in order for their members to provide a different perspective necessary to challenge senior executives and non-executives as well as to counter groupthink and unconscious biases that might dominate decision-making.
Benefits
It is in companies’ interests to have greater diversity at the board but also at the executive and non-executive levels below. An increasing body of research shows that greater diversity leads to better performance of companies. McKinsey’s 2015 Diversity Matters study says that gender-diverse companies in the top quartile for diversity are 15% and ethnically diverse companies 35% more likely to financially outperform those in the bottom quartile. In the UK, for every 10% increase in gender diversity, earnings before interest and tax rose by 3.5%, according to the study.
Other research shows that different forms of diversity bring values and change corporate risk-taking behaviour and may even have an impact on likelihood of fraud. Groups that perform at a high level have a wealth of external perspectives, characteristics and approaches to problem-solving, and manage the differences and potential conflicts of diversity well to reap its benefits. However, selection and promotion processes at most companies currently do not promote diversity and instead continue to build homogenous teams.
Engagement
Often, diversity is too narrowly defined and some companies may pay lip service to it as a compliance issue without understanding how diversity initiatives could bring benefits to them. We therefore seek to engage with companies and discuss their strategy on how different dimensions of diversity are taken into account, so that diversity truly becomes a strategic response rather than a knee-jerk reaction to developing trends, expectations and opportunities.
Most of our work on diversity has focused on board composition with objectives relating to independence, countries of origin/international experience reflective of the footprint of the company and professional or industry experience. Moving beyond these initial criteria, we are also looking at how board membership factors in gender as this tends to force companies to look outside their traditional talent pool.
Encouragingly, more companies are making an effort to increase diversity – including beyond the board.
Equal pay
With good progress being made on the representation of women on FTSE 100 boards, focus has turned to the low number of women chairs and the loss of talented, senior women from the executive pipeline. One contributing factor to this may be the pay gap between the genders whereby men get paid significantly more for the same role. The UK’s Chartered Management Institute found in a 2014 study that women only take home 77% of men’s earnings in full-time comparable jobs.
Large employers in Austria, Finland, Germany and Sweden are already legally required to report on their gender pay gap.
In 2015, the UK government proposed that UK companies should provide an overall gender pay gap figure that captures the difference between the average earnings of men and women as a percentage of men’s earnings.
We welcomed this proposal, as we believe the publication of an overall gender pay gap figure is an important step forward. The published figure may not provide meaningful comparisons across sectors but will reflect different and specific circumstances for each organisation beyond a simple pay gap issue. Overall, we feel this legislation has the potential to encourage companies to ask themselves the right questions regarding their general approach to diversity and human capital management.
In our engagement, we find companies that are implementing measures to improve equality to be more transparent and willing to share data on their progress, including survey results. We encourage the gender pay gap indicator to be made available to all stakeholders, including employees.
Diversity framework
We are developing a methodology that can be tailored to our engagement with companies in which our clients invest. We are taking a pragmatic approach to its design, which encompasses culture and regulation, sector, geographic footprint and the capital structure of a company, all of which can contribute to the unlocking of value and avoidance of risk.
We will continue to challenge companies that fail to tackle diversity issues and push them to meet the voluntary targets or quotas. We will also increase our focus on achieving greater diversity at the executive level.
Natacha Dimitrijevic is head of European engagement at Hermes EOS
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