Philip Sidney, Senior Associate, Lintstock, highlights the findings of a new Lintstock study indicating that better gender diversity on boards is not only a question of fairness, but of effectiveness.
The growing momentum behind gender diversity on corporate boards has been one of the most noticeable developments in corporate governance over the past decade. The push for diversity has certainly changed the face of boards in the UK. The Hampton–Alexander Review recommended in 2016 that FTSE 350 boards should aim for a minimum of 33% female representation by 2020, a target that was achieved in 2021. As readers of this journal will know, Hong Kong is moving in the same direction following a change to the Corporate Governance Code in 2022. All listed companies in Hong Kong are required to appoint one director ‘of a different gender’ to the other board members by the end of 2024.
The benefits of gender diversity are generally well recognised. At a time of increasing scrutiny of the corporate world from politicians, regulators and the general public, there is an increasing expectation that company boards ought to reflect the demographic makeup of their stakeholder universe and wider society as a whole. Equally, it is widely acknowledged that broadening diversity in the boardroom contributes to diversity of thought and helps boards to avoid the risk of groupthink. As board reviewers, we at Lintstock have seen many examples of male and female directors consistently engaging differently on areas of board performance – for example we tend to find that it is female directors who are more likely to address uncomfortable issues such as CEO succession.
Nevertheless, it is difficult to come up with hard evidence to back up such observations. Conversation on board gender diversity is often stymied by the difficulty of proving the impact that female representation has on a board’s dynamics and focus, and ultimately its oversight. Understandably, the necessary confidentiality of the board environment makes research into this area difficult, leaving studies to judge the impact of board diversity by extrapolation rather than direct evidence (for example by comparing companies’ financial performance and correlating it with the female representation on their respective boards).
Lintstock’s latest piece of research – Evidencing the Contribution of Gender Balance to Board Effectiveness – produced in partnership with the 30% Club, aims to address this gap. Leveraging our experience of working with corporate boards and drawing on our unique set of quantitative and qualitative data from years of board reviews, the study demonstrates definitively that a gender-balanced board is more than the sum of its parts. Taking an evidence-based, data-driven approach, the study explores the nuances of male and female director engagement.
Our data is based on the Lintstock Governance Index – a set of over 60 metrics, drawn from Lintstock’s recent board reviews, that puts performance in context by tracking the relative strengths and weaknesses of boards. Using the data contained in the index, we tracked directors’ quantitative and qualitative assessment of performance across some 100 UK board reviews, and split out the responses of male and female directors in order to build an overall picture of the contributions made by both sexes and to observe how they complement and interrelate with one another. In doing so we have been able to track engagement on an entirely anonymous basis, gaining insight from behind the boardroom door to form an analysis that is based on information rather than anecdote.
How directors engage
The data shows that including gender diversity on boards is not only a question of fairness, but of effectiveness – it is clear that female directors’ contributions augment and round out overall board oversight. Male and female directors gave similar ratings when assessing the majority of board effectiveness metrics, which demonstrates that there is good consensus across boards as a whole – but the span of women’s ratings tended to be wider on both the positive and negative ends of the scale, and on average women’s ratings of performance were slightly lower. This suggests that women are more likely to be critical of poor performance, as well as being more likely to reward areas of good performance with a higher rating.
This is borne out in the relative engagement of male and female directors in the board review exercise, at least judging by word count – on average, female directors write 32% more than their male colleagues, indicating that women are more open to providing feedback on performance.
Some of the directors’ respective areas of confidence and sensitivity in the data also point to a difference to the way in which male and female directors engage in and around the boardroom. Two areas in which there is a significant divergence in sentiment between men and women is the length of the board packs and the length of board meetings, both of which are rated notably more highly by female directors. It seems that female board members are significantly more tolerant of larger board packs, in contrast with their male colleagues who consistently demand greater concision and summarisation.
Similarly, women were more than 30% more likely to request more or longer board meetings. Coupled with the higher levels of engagement that female directors demonstrate in board reviews, these findings suggest a greater willingness among female directors to accept the overhead of board service and invest time in building board oversight.
Where directors focus
Through the data it is also possible to map differences in where board members direct their focus when considering certain topics. Both male and female directors tend to feel that their boards spend too little time on strategy, but within this context men were more inclined to focus on specific elements of their company’s strategic plan and the wider shape of the business, whereas women focused more on the enablers of performance (that is, people, customers etc) and took much more of a big-picture approach.
There was also a marked tendency for female board members to engage more on emerging issues and in the areas in which boards struggle the most – though these areas often overlap, as it is a rare board that can establish perfect oversight of issues as soon as they show up on the radar. Most prominent among these is people oversight, with metrics in this area – covering succession, talent management, employee engagement and culture – regularly featuring at the lower end of the Lintstock Governance Index.
People oversight was moving up the agenda of UK boards even before the Covid-19 pandemic’s impact on remote working practices and employee well-being. Responding to growing scrutiny of issues such as pay ratios and workers’ rights, the 2018 update to the UK Corporate Governance Code (the UK Code) introduced a requirement for boards to engage with their companies’ workforce through the appointment of an employee to the board, the establishment of a formal workforce advisory panel or the appointment of a designated non-executive director for employee engagement.
The female directors in our sample engaged heavily on employee sentiment and culture, which were two areas in which engagement varied notably between the sexes. Women were 70% more likely to recommend increasing the board’s direct contact with employees, and were over twice as likely to suggest increasing the amount of time the board spends considering culture. This level of engagement could be connected to female directors embracing the new UK Code requirements – female respondents were over twice as supportive of employee engagement initiatives, and in our sample women were 50% more likely to serve in the role of designated non-executive director for employee engagement.
Diversity – moving beyond gender?
Perhaps unsurprisingly, the focus on diversity was an area in which some of the most interesting findings emerged in our research. Having been a key concern in discussions of board composition for a number of years, anxieties around representation and social justice (highlighted by movements such as #MeToo and Black Lives Matter) have made this issue more and more pressing. We know of many boards who have experienced a step change in investor and societal engagement around board diversity over the past two years, and for whom diversity represents a significant reputational risk. Indeed, some institutional investors have indicated that they will vote against any FTSE 350 board that does not comply with the Financial Conduct Authority’s requirement for 40% female representation on boardsand leadership teams, even before the FCA itself brings in that requirement in 2024.
Against such a backdrop, it is natural that both male and female directors are likely to raise diversity as an area for improvement in board composition, with gender being the most frequently specified area for improvement by all. That said, our data suggests that the focus in this area is evolving and moreover that this evolution is being led by women – whereas male directors were 25% more likely to stress the need to improve gender diversity on the board, their female colleagues directed their attention to augmenting other areas of diversity.
Notably, the female board members in our sample were three times more likely than their male counterparts to prioritise improving their boards’ ethnic diversity. This issue has become markedly more salient in the past two years, given the political and social fallout of the killing of George Floyd in 2020, and over half of our board review exercises in recent years have seen the appointment of an ethnic minority director identified as a priority. This desire is particularly pronounced in financial services companies, where practically all of our clients over the past two years have emphasised the need to improve their board’s ethnic diversity.
Women were also more likely to recommend including greater diversity in other areas, including age, culture and social background, and we tend to find that this is particularly the case when we work with non-corporate clients such as utility providers or charities. We anticipate that the conversation around diversity will continue to broaden over the coming years, moving beyond what we have seen several boards refer to as ‘visible diversity’ to encompass areas such as culture, socioeconomic background, disability, neurodiversity and sexual orientation.
As boards continue to evolve, companies will need to continue to balance diversity considerations with ensuring that the board retains the skills and expertise necessary for maintaining effective oversight of the business. That said, it is to be hoped that continued efforts to promote diversity amongst top management and the wider workforce will ensure in time that the pool of experienced candidates is sufficiently diverse for this not to be an ‘either/or’ question.
Conclusion
We hope that through our research we have been able to demonstrate what diversity delivers, by showing how the engagement and contribution of female directors improves oversight through rounding out the board’s focus. As mentioned at the outset of this article, the momentum behind gender diversity is increasing and expanding, and in the UK organisations are now setting their sights on achieving greater gender balance on executive committees, as well as removing the barriers preventing women from occupying the top positions of chair, senior independent director, chief executive and chief financial officer. In July this year, the Severn Trent water company will make history by becoming the first FTSE 100 company to have a female chair, chief executive and chief financial officer. As boards look to gain greater dividends from diversity in the future, it is to be hoped that further data and insights will emerge to verify the benefits that gender diversity, and diversity more broadly, brings to and around the boardroom.
Philip Sidney, Senior Associate, Lintstock
Lintstock is a London-based corporate governance advisory firm specialising in board effectiveness reviews. The firm conducts research into topical governance issues and hosts webinars and workshops for company secretaries around the world.
On 14 June at 3.30pm HKT, Lintstock is hosting a one-hour webinar discussing its research into gender balance, where it will be joined by a panel of experts, including Hanneke Smits (Global Chair, 30% Club) and Denise Wilson OBE (CEO, FTSE Women Leaders Review).
For more information, or to obtain a copy of Evidencing the Contribution of Gender Balance to Board Effectiveness, please contact Lintstock Partner Neil Alderton at: na@lintstock.com.
