Travers Smith's Sustainability Insights: Can the UK's FCA move the needle on diversity?

Consistently with many other peer-reviewed academic studies, the authors found no link between financial outcomes and the traditional measures of diversity.  However, they did find a significant positive relationship between future accounting performance and other, perhaps more important, DE&I indicators.

The paper points out that traditional DE&I metrics tend to focus on demographic diversity: for example, the number of women or ethnic minorities on a board or in the workforce.  While these may be a stepping stone to the changes that a company needs to make, they should not be regarded as an end in themselves.  Changing the culture of an organisation, so that people from all backgrounds are able to participate actively and on equal terms, must be the ultimate goal.  That has the added advantage that the impact then extends beyond gender and race and also includes, for example, greater inclusion of people from different socio-economic backgrounds.

The contribution of this new academic paper, Diversity, Equity and Inclusion, is that it looks at the answers to thirteen of the questions used to compile the list of 100 Best Companies To Work For in America.  These thirteen questions are selected because they represent an inside view of the culture, indicating (among other things) whether people who work for the company feel valued irrespective of their background, gender, race, religion, sexual orientation or other characteristics. 

This measure of DE&I is only "weakly correlated" with more traditional diversity indicators, suggesting that demographic diversity on its own is not a very good predictor of a positive culture.  And, perhaps unsurprisingly, these traditional metrics are also not linked to more positive financial outcomes. 

Interestingly, however, companies that score well in the relevant questions from the Best Companies survey – and are therefore judged by the researchers to have a DE&I-friendly culture – do have better accounting financial performance than their peers. 

The authors do not claim that this correlation proves causation – although they do not rule that out.  (An alternative view would be that there is a common cause behind the positive correlation: a good culture may indicate more effective management, which itself also contributes to financial outcomes.)

These findings are heartening for those who believe that cultivating DE&I is not only the right thing to do, but will also help an organisation to reach its financial goals.  But it also means that firms need to dig deeper than looking at headline numbers – and go beyond hitting demographic targets – if they want to understand whether their efforts are achieving their underlying objectives. 

The FCA proposals, which are out for consultation until 18 December, clearly recognise the importance of culture and the need for firms to go beyond headline demographic targets.  They also recognise that a "one size fits all" approach would not be appropriate. 

For all firms, the starting point is that harmful practices should be identified, and steps taken to weed them out.  To this end, the FCA wants firms to take a more robust approach to non-financial misconduct such as bullying and harassment, arguing that it is detrimental to an inclusive culture.  Non-financial misconduct will become part of the fitness and propriety assessment under the Senior Managers and Certification Regime and integrated into the Code of Conduct. 

For larger firms – those with over 250 employees – the centrepiece of the proposals is a new requirement for a Diversity and Inclusion (D&I) strategy, owned by the board and available on the firm website, with firm-specific targets that address identified areas of under-representation.  These large firms will also be required to report diversity data to the FCA and, importantly, to report using some consistent inclusion metrics based on a staff survey. 

The inclusion measures were developed "through research on industry practice and materials such as the FSSC [Financial Services Skill Commission] Inclusion Measurement Guide", and the FCA says that 84% of large firms already use staff surveys to measure inclusion.  They are designed to identify whether individuals feel valued, and whether the firm treats everyone fairly.  They go well beyond headline numbers, and might identify issues in a firm that otherwise ticks the boxes.

There are concerns, of course.  For example, some firms will be worried about setting targets.  It will certainly be important to do that carefully.  Targets must not operate as de facto quotas, and should not influence individual recruitment or promotion decisions.  US firms will be acutely aware of the Californian court's decision to strike down affirmative action in college and university admissions, while UK law also prohibits positive discrimination (to be distinguished from positive action, which can be lawful if it meets statutory requirements).

But firms are likely to welcome a thoughtful, measured and evidence-based intervention by the UK regulator, which for many large firms codifies existing practice.  They will be fully on board with the objective, and pleased that the FCA recognises the multi-faceted nature of the challenge.