Ethnic Diversity in Corporate Leadership: The start of a journey

Non-disclosure and cultural issues have hindered progress on issue, say experts

For years, the world’s biggest companies have pledged to increase the proportion of ethnic minorities on management teams and boards. There is little to show for it.

ISS ESG reported last month that 84.2% of US Russell 3000 companies had no ethnically diverse top executives among their top five executives – only 1.4% less than in 2016.

Things aren’t much better in the UK. In March, the government-commissioned Parker Review found that 59% of 256 large UK companies had no minority board members; this rose to 69% among FTSE 250 companies. Companies are up against a ticking clock to meet the UK Government’s ‘One by 2021’ target of having at least one minority director by next year.

Generally, the business case for diverse leadership is twofold. 

First, laggards run the risk of reputational damage as customers and wider society become increasingly sensitive to practices seen as racist. For many, the tragic death of George Floyd in the US in May was a warning against leaving systemic inequalities unaddressed, and the expectations on companies to acknowledge and address poor behaviour are clearer than ever. 

Second, companies that reflect the diversity of the communities they serve are said to demonstrate better decision-making. Research by Boston Consulting Group and ISS ESG suggests that firms reporting above-average diversity among senior leadership outperformed less diverse peers both globally and in the US.

Diverse management teams are also thought to be less prone to social controversies. Recently, miner Rio Tinto agreed to increase indigenous representation among its leadership positions after the company’s destruction of an ancient Aboriginal site caused global outrage. The scandal saw the resignation of CEO Jean-Sébastien Jacques and major pushback from investors, despite a year of record-breaking profits.

Andy Jones, who engaged with Rio Tinto for EOS at Federated Hermes, tells RI that board and management teams must reflect the communities “whose lands, resources and heritage are, or are at risk of being, impacted” by a company’s operations.

“Decision making inclusive of such diversity is fundamental to corporate risk management, but many companies around the world continue to fall far short,” he explains.

But this is not yet reflected in mainstream thinking. S&P’s ESG evaluation framework, for example, assesses corporate policies and performance in relation to local communities separately to the topic of workforce diversity and inclusion, and does not draw any explicit link between the two Social factors.

Perhaps the biggest hurdle to addressing corporate ethnic diversity is the absence of data. While gender diversity can often be assessed using filings and other records, ethnicity is harder to pin down. Consequently, self-identified workforce data is seen as essential for stakeholders to accurately assess performance.

But with no requirements to publicly disclose workforce and pay breakdowns along ethnic lines in any major market, investors are reliant on voluntary disclosure, and that’s carried out by just a sliver of companies: under 3% among Russell 3000 firms, and 11% of UK firms, according to estimates. 

Andrew Mason, Stewardship Director at Aberdeen Standard Investment, suggests that most companies do not yet see the benefits of disclosure. “I imagine the hesitation is because companies don't see a first mover advantage in this unless they have really good numbers, which only a very small minority do,” he says. “But if you see others disclosing and your numbers are similar, even if they're not great, I think that would push companies along.”

In Europe, new privacy laws have made gathering relevant data even more difficult. A survey of 80 companies by PwC found that 40% did not collect data relating to ethnicity pay gaps due to concerns over its legality. The same restrictions resulted in the UK’s Parker Review having to rely on voluntary corporate disclosures in its 2020 assessment of board diversity. 

Without sufficient data, the bulk of investor engagement on the topic focuses on improving transparency, says John Wilson, Director of Corporate Engagement at ESG shop Calvert Research and Management. “The problem is that diversity reporting on ethnicity is inconsistent and incomplete most of the time. Companies tend to cherry pick information that makes them look good and in many cases don’t even know what information is important.”

In the US, Calvert encourages companies to disclose their EEO-1 form, a confidential filing to the US federal government that breaks down workforce composition by race and gender – long seen as the ‘gold standard’ for diversity disclosures. Just last week, a coalition of 34 large US companies committed to disclosing the form following a campaign by NYC Comptroller Scott Stringer, in a sign that EEO-1 disclosures could be picking up.

A key area for improvement, advocates say, is corporate diversity and inclusion programmes that, despite being widespread, are often poorly defined and result in targets with little strategic relevance. Amy Wilson, an engager at EOS, calls for a “thoughtful approach” that starts with assessing the specific context of an organisation, including the communities it draws from and serves, and implementing specific, contextual initiatives to address any gaps.

Andrew Fairbairn, CEO of SEO London, a charity matching gifted youth from underserved backgrounds with career opportunities, says that corporate diversity initiatives tend to focus on increasing the diversity of new recruits, instead of addressing underlying cultural factors.

“Much of the focus of early careers recruiters is on simply getting people in the door and once they're in, they become a different team's problem,” he says. 

“All too often, candidates who are hired only to meet a diversity target end up leaving through the back door because the culture that they've just walked into is not aligned in a way that facilitates their success. Simply hiring more people is easy to do. Where the real focus needs to be is around the trickier topics of retention, promotion, learning and development, value creation and value delivery.”

Fairbairn, a former Deutsche Bank Vice President, says it is important that corporate diversity initiatives involve senior leadership, who he describes as “arbiters of their firm’s culture”. He suggests ‘reciprocal mentoring’ programmes as one approach – a twist on traditional mentoring, which emphasises the opportunity for leaders to also benefit from the diverse life experiences of their mentees.

But Fairbairn is not in favour of mandatory targets, saying “quotas are very effective to get something done, but they can create blowback and resentment. I think there are less blunt instruments of change to get to the same place.”