Good governance is diverse governance

The UK’s boards of directors still in no way reflect the stakeholders their companies serve - whether customers, employees or suppliers. This was confirmed in 2017 by The Parker Review. Good corporate governance also requires diversity in all of its forms – gender, ethnicity, sexuality, socio-economic background and thought. The data shows that diversity is good for business and the bottom-line. A report by Involve in collaboration with the Centre for Economic and Business Research (CEBR) found that the UK’s most diverse workplaces (across gender, ethnicity and sexual orientation) are 45% more likely to financially outperform their industry average than the least diverse firms. McKinsey & Company research found that the most ethnically/culturally diverse boards worldwide are 43% more likely to experience higher profits.

Appointments from a small pool of people with the right credentials will maintain the current unacceptable pace of change and dampen the positive returns created by diverse governance.

Significant progress has been made to balance gender in the boardroom of UK PLC, but still only 28% of FTSE100 board members are female and our listed companies represent less than 0.04% of the UK’s 5.7 million companies and therefore boards. Currently, 14% (rising to 20% by 2030) of the UK’s population are ‘people of colour’, yet even in the FTSE-100, where there is institutional and regulatory pressure for change, only 2% of directors are UK citizens of colour. Strong, diverse boards make absolute sense for any company, but it is those that have raised external capital, directly or via venture capital or private equity that are more likely to appoint non-executive directors for oversight, expertise and governance. It is impossible to commit the time required with a strong of appointments hoping that none will blow up and jeopardise future appointments. Experience is clearly essential, but the demand for governance and risk management from UK’s companies should not be seen as a way for a select few to comfortably fund a plural retirement – hired by executives or even a committee that looks or at least thinks just like them.

Last year saw the 25th anniversary of the publication of the Cadbury Report and subsequent creation of the UK’s Corporate Governance Code with the latest version taking effect for companies with a Premium Listing in 2019. Increasing demand for objective oversight has spurned a growing industry for both firms placing non-executive directors and appointees with some paid directorships. Even privately-owned businesses and startups recognise the need for independent and objective input into decision making, risk management and oversight and the value of diverse thought, relevant expertise and external perspectives. Some appointees are truly independent while others are appointed for oversight or to provide guidance by institutional investors. Others are appointed for corporate public relations so that an impressive board can be presented for credibility or to support a fundraising process. This is effectively trade in the use of an impressive résumé for an annual fee – business value added or good governance is secondary.

The slow pace of change is not due to a limited supply of hungry talent itching to impart their experience and provide objective oversight. There is no need to rely on those with numerous active directorships who can’t commit the necessary time to discharge their duties. The boards of all of the recent large corporate failures (e.g. Carillion) hardly represent the diversity within their supply chain of SMEs. As a Non-Executive Director myself, I have first-hand knowledge of the networks and processes that lead to senior board appointments. I am lucky to serve on diverse boards that take governance seriously, but it is often apparent to me that those making appointment decisions, whether recruitment or search consultants or private equity investment managers, need to change the game by reaching out, and even down, beyond existing networks.

Pressure to ensure that the UK’s boards are diverse and reflect a widening group of stakeholders has brought about limited change and pressure can only be applied to change the make-up of listed company boards. Venture capital and private equity firms are key to growth and our scaleups, but the make-up of the investment firm partners and the boards they appoint as well as the entrepreneurs they back suffer from a distinct lack of diversity. They too should reach beyond their networks and be aware of the impact of conscious and unconscious bias on their recruitment decisions.

Corporations exist at the behest of society, and therefore they should understand and reflect society. If that is too intangible, then surely the impact on the bottom-line is enough to encourage change.

© Piers Linney 2018

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Piers Linney is an entrepreneur and investor with a professional background in the City in both law and investment banking at Credit Suisse. He is known as a champion of entrepreneurship and SMEs is best known as a former investor on BBC’s Dragons’ Den (Shark Tank in the US). Piers has broad experience of the financial and operational challenges that face SME businesses as a founder, adviser, director and investor. Piers has founded several technology and communication businesses and has won a range of entrepreneurship awards. He sat on the Cabinet Office SME Panel and the Board of TechUK, and is a Trustee of Nesta, the UK’s leading innovation charity. Piers is a Non-Executive Director of the government-owned British Business Bank, which has facilitated £12 billion of finance to unlock capital for UK growth businesses, and which also operates StartUp Loans and the British Patient Capital (£2.5 billion).

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