This month the FCA announced that it will require all listed firms to report the diversity make up of their boards. Not only that, but it insists that 40% of board roles should be represented by women, that non-white ethnic minorities have representation, and that at least one senior board position should be filled by a woman. With large gender pay gaps across the financial services sector, will this requirement finally be the nudge the industry needed?
A more diverse board is good for governance. Having diverse membership promotes a healthy culture in the rest of the firm, advances consumer protection and promotes effective competition through enhanced integrity. However, the FCA hasn’t introduced mandatory quotas and there’s no regulatory requirement to fill the 40% quota.
Why the industry needs gender diversity
Under the new policy, firms will be asked to comply or provide a good reason as to why they haven’t complied. The gender pay gap in the financial services sector is still larger than across many other UK industries, despite there being a requirement for the past four years for companies to report on their pay gap. Investment banks and wealth managers are the major outliers, with gaps of more than 35%. In some sectors, such as consumer finance, diversified financials and wealth management, the pay gap is virtually unchanged since reporting began: a mere one percentage point improvement over three years. Arguably, reporting without regulation will not see these diversity requirements be put into place.
What are the benefits of diversity?
We see the benefit of diverse boards as far outweighing any arguments about token gestures or positive discrimination. Reducing groupthink is key as we look to a world of good customer outcomes and consumer duty. Diverse leadership at board level should provide four key outcomes:
- Supporting a healthy culture to deliver higher standards of conduct.
- Reducing groupthink to support effective governance, challenge and decision making.
- Promoting innovation and competition in products that cater for a diverse customer base.
- Unlocking talent and making the UK market an attractive place to do business.
Not only in the world of consumer duty and good governance does diversity make sense, research also shows that firms with more diverse make up also perform better. McKinsey research from 2020 analysed global companies and found that companies with more equal representation are 35% more likely to outperform their less diverse competitors.
So, whether it’s for reasons of good governance, compliance with consumer duty or simply to protect your bottom line, you should be looking at your board and aiming to make it as diverse as possible.