Board diversity leads to better profits

When you think about the cut and thrust of business, the first thing that comes to mind probably isn’t the diversity of the people working in an organisation.

However, it has been found that the UK-listed firms with more diverse boards have better profits than firms with ‘male, pale and stale’ boards.

A diversity of people, thought and backgrounds appears to drive profits.

The research, Board Diversity and Effectiveness in FT350 Companies, found that:

• Higher levels of gender diversity of FTSE350 boards positively correlate with better future financial performance (as measured by EBITDA margin).
• FTSE350 boards with well-managed gender diversity contribute to higher stock returns and are less likely to experience shareholder dissent.
• Diversity affects boardroom dynamics, and that the percentage of women is highly correlated with an emphasis on boardroom relationships and collaboration.

The hallmarks of boards with more women included:

• Significantly greater decentralisation in how they operate where committees have strong delegated powers.
• Increased likelihood of reaching consensus before important decisions are taken, rather than undertaking decisions that a substantial part of the board opposes (e.g. by voting)
• Stronger belief and action on ensuring fair outside search when recruiting directors because standards should apply to everyone equally; and
• Reduced overconfidence about the board’s problem-solving skills.

In short, diverse boards make better decisions and result in better outcomes and profits for big companies.

And when we say diversity, we don’t just mean gender diversity (more women in the boardroom). Diversity is also about age, background and skills.

The research found that the skills needed in diverse boardrooms include adaptability and resilience, strategic thinking, stakeholder engagement, interpersonal skills and embracing change.

There are several actions that the nomination committees can take to encourage diversity. These include ensuring that the nomination committee itself is diverse and has a clear mandate to work with search firms that access talent from broad and varied pools.

“I want to see boards invest time and energy in making diverse appointments not to achieve a target but because it will have a positive impact on their business,” says Sir Jon Thompson, CEO, FRC.

“The UK Corporate Governance Code makes it clear that board appointments should promote diversity, and we want to see nominations committees reporting on progress,”

“Board diversity should be a priority for every organisation. Successful boards care because they want to perform as a team to serve their organisation and serve the world.”

Diversity takes many forms. The report’s findings show diversity is not just a numbers game regarding who is on the board; it’s how board members interact that matters.

“We hope this report will stimulate new thinking and action on how all groups can genuinely feel included and supported at the top table,” says Dr Randall S. Peterson, academic director, London Business School Leadership Institute.

The report was published by the FRC in conjunction with London Business School, Leadership Institute and SQW.