Shareholders should put pressure on their companies to make their boardrooms more diverse as it leads to better corporate culture and performance, research has proved.
A report from the UK’s financial reporting body found that greater representation of women in the boardroom is reshaping culture and dynamics and benefiting businesses from a social justice as well as a performance perspective.
But the Financial Reporting Council (FRC) said its research showed there is “still a long way to go to fully access the diverse talent in the UK population”, with building and maintaining diversity requiring proactive planning, concrete actions and consistent prioritisation.
Analysing two decades of data, the researchers found that higher levels of gender diversity of FTSE 350 boards positively correlated with better future financial performance, as measured by EBITDA, with the effect being the strongest after three to five years.
Better-performing firms experience greater benefits in terms of financial performance from gender diversity, with analysis showing that the top 50% of the sample of companies that had at least one woman on the board experienced higher levels of EBITDA margin after three years.
Moreover, FTSE 350 boards with well managed gender diversity were found to contribute to higher stock returns, as well as being less likely to experience shareholder dissent.
“These results are significant because, for decades, researchers have largely failed to confirm any causal link between board demographic diversity and a firm’s overall performance or market value,” the reports authors said.
In terms of ethnic minority diversity, levels were too low and with little change over the period to measure the impact of change with any confidence.
Board diversity is a “long-term, multi-stranded journey where progress in one area is not a guarantee of progress in another”, the research showed, with diversity not a linear progression, but multi-faceted, and the results from having a diverse board not instantaneous, but a long-term commitment.
The research offers practical pointers, including on the need to think about how diversity is achieved at senior levels, setting appropriate objectives, how they can be achieved through recruitment, career progression, succession planning and appropriate internal structures. The points made in the report about important.
The report was published today by the FRC in conjunction with London Business School, Leadership Institute and SQW.