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Three Ways for UK Companies to Avoid Quotas and Build Diversity

By Melissa J. Anderson

Recently Newton Investment Management, a UK investment management subsidiary of The Bank of New York Mellon, released a white paper on the strategic value of diversity in the investment space – The Dynamics of Diversity [PDF].

The firm’s chief executive Helena Morrissey has been outspoken on the importance of gender diversity and the document expounds on the value of diversity when it comes to good corporate governance.

Morrissey, also one of the founders of the 30% Club, a London-based group to increase the numbers of women board directors, said:

“The financial crisis has highlighted the dangers of ‘groupthink’ at board and senior management levels. Active debate and robust challenge are crucial to effective decision-making and diverse groups are more likely to identify creative solutions and offer a broader range of perspectives. The empirical evidence of the positive impact of a more diverse board on corporate performance is growing and we expect this issue to become an increasing focus for active investors.”

Morrissey and Newton believe that a quota-based solution for increasing diversity in the boardroom is the wrong route for improving governance. The report notes that true diversity comes from original thought – not mere box-ticking.

“As with many wider aspects of corporate culture, diversity occupies the awkward hinterland beyond mere regulation. Its essence is variety, and as such there is no ‘optimum’ combination of board composition; it is equally important that relevant skills, qualifications and experience are not overlooked in favour of diversity for diversity’s sake.”

Morrissey added:

“This issue is about delivering better business results and that requires real, sustainable changes to business culture… In the 21st century global environment, diversity is not simply an optional extra or a distraction. Companies that make a concerted effort to attract and recruit talent from the widest possible talent pool risk are more likely to succeed and to attract investment.”

But, while a quota-based solution is not what Newton supports to increase diversity, the report explains, there are several ways non-quota based ways that can improve diversity and governance, without resorting to legal measures.

1. Structural Change

First of all, explains the white paper, because the main problem seems to be one of retention, a quota-based solution is inefficient. Companies need to look to structural solutions to keep women in the ranks past the junior management level. Nevertheless, it continues, the threat of quotas has raised the profile of the gender-diversity conversation.

Likewise, corporate diversity as a whole has been given more attention following the release of the Lord Davies report last spring, which shone a spotlight on the lack of women and minorities in the top ranks of the UK’s companies. The report suggests that businesses make an effort to reduce the structural barriers driving diversity out of the workforce. It says:

“Whether through training, work experience, opportunities, cultural adjustments, or most likely a mixture of such strategies, the responsibility lies largely with individual companies to implement initiatives to support women and other minority groups at every stage of the career path. Otherwise, these employees will remain at a disadvantage in terms of acquiring valuable experience and qualifications, and a void of suitable, experienced candidates with the skills and creativity to improve company performance will persist.”

2. Government Recommendation

Second, the report continues, it appears that just the threat of government intervention has encouraged more firms to increase diversity efforts.

Since the Davies report was released in February, the threat of quotas has hung over the heads of board appointment committees. Additionally, it says, “…in the UK, senior cabinet ministers have written to all chairmen and chief executives of FTSE 350 companies to remind them to set targets for increasing the percentage of women on their boards.”

As a result, 30% of new FTSE100 board seats have gone to women this year. The study does not point out that this amounts to only 18 board seats – but, it can be seen as some measure of progress nonetheless. It’s still more than twice the number of women who have been appointed to boards annually in the past.

3. Comply or Explain

Finally, the report says, the 2010 UK Corporate Governance Code includes a new recommendation that board appointments be made based objectively on merit and “with due regard for the benefits of diversity.”

Based on the Code, the Financial Reporting Council has published a consultation document recommending that companies put together a gender diversity policy with measureable objectives. The report says, “…the strength of the “comply or explain” approach and its aspect of self-regulation is relied upon successfully for a variety of corporate activities in the UK…”

The report adds that a similar program has proven very successful in Australia for increasing board diversity, increasing the number of female board appointments to ASX200 companies to 25% in 2010 and to 30% this year.

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