Investors’ pressure for ethnic diversity on boards ‘an issue for HR’

The Investment Association has outlined its expectations of companies on issues including climate change, diversity, and executive pay, ahead of the 2021 AGM season. Its key message is investment managers will be ‘turning up the pressure’ on companies to improve ethnic diversity on their board and to report on climate-related risks. The move puts even more pressure on the UK's largest listed companies to demonstrate their commitment to those areas as well taking a circumspect approach to executive pay in the coming months. FTSE companies' annual reports will be colour-coded – blue, amber, red – to highlight breaches of best practice or areas of concern. Red denotes the strongest concern, followed by amber which shows a significant issue to be considered. A 'blue top' indicates no areas of major concern. Let's hear more about this from rewards specialist James Sullivan-Tailyour. He joined me by video-link and I started by asking whether this guidance is significant: 

James Sullivan-Tailyour: "Absolutely. Any guidance published by the Investment Association is always significant. The Investment Association is one of the most influential bodies that represents institutional investors, UK institutional investors, and what they've got to say always needs to be thought about carefully because they represent the views of some of the largest shareholders in the UK. This guidance is particularly important because it's setting out the Investment Association's stall as to how it expects companies to be addressing two key areas, board diversity and climate change and, importantly, how its associated proxy voting agency called IVIS will be issuing what we call blue, amber and red top recommendations to companies. These are essentially voting recommendations that are advising institutional investors on how they should vote on certain company resolutions. Companies that are given a blue top by IVIS are companies where there haven't really been any material concerns identified. Companies with an amber top are companies where some concerns have been identified by IVIS and then companies with the red top are obviously companies where there are significant areas of concern and where IVIS is effectively recommending the shareholders vote against any resolution.”

Joe Glavina: “Is there a role here for HR and, if so, what is it James?”

James Sullivan-Tailyour: "Absolutely, there's a role for HR here because the two areas that have been identified - board diversity and climate change - are key areas where HR can drive change and inform a culture within the organisation. So with respect to board diversity, the Investment Association now expects that companies will have at least 30% of their board members female, that's for FTSE 350 companies, and they're also cascading that to the next level below directors, so there's also an expectation that at least 25% of the members of the company's executive committee should be represented by female members and the HR department will obviously be really key in making sure that recruitment and promotion policies internally are aligned to those objectives and making sure that female promotion and recruitment is accounted for. The other area where the Investment Association is looking to see improved board diversity is with respect to ethnic minority representation and again the Investment Association has identified that ethnic minority representation has not been good enough and it will now be issuing amber top recommendations, so we'll be identifying companies presenting some concerns, if either they don't publish the breakdown of the ethnic diversity of their boards and/or if they don't introduce a credible action plan for appointing at least one board director from an ethnic minority background by the end of 2021. So again, HR is going to be crucial as part of that process of improving board diversity.”

You can read the Investment Association's guidance in full by visiting the IA's website and we do recommend HR professionals to look at this to understand fully investor expectations around diversity and climate change. We have put a link to the guidance in the transcript of this programme.

LINKS

- Link to Investment Association guidance