The study, Board Diversity and Effectiveness in FT350 Companies, conducted in conjunction with London Business School, Leadership Institute and SQW found that higher levels of gender diversity of FTSE 350 boards positively correlate with better future financial performance. 

In particular, it found that FTSE 350 organisations with at least one woman on their board enjoyed higher levels of EBITDA margin after three years, witnessed higher stock returns and were less likely to experience shareholder dissent. 

The research also shows a significant but weaker relationship between a greater ethnic diversity of FTSE 350 boards and a reduction in shareholder dissent. However, the report says that ethnic minority diversity remains low and has not changed enough to measure the impact of change with any confidence.

The 132-page report concluded that it is the responsibility of the Chair of a board to drive inclusion and the Nomination Committee itself should be diverse and have a clear mandate to work with search firms that access talent from wide and diverse pools. The report also stresses the need for regulators and companies to focus on collecting more data on the types of diversity, board dynamics and social inclusion.

Rather than leave diversity to chance, the report warns that building and maintaining diversity requires proactive planning, concrete actions and consistent prioritisation. It also says boards should recognise that change takes time and that diversity without active inclusion is unlikely to encourage new talent to the board.

Commenting on the findings, FRC Chief Executive Sir Jon Thompson said: “Too often the discussion about the merits of diversity at senior levels in business can boil down to a moral or business case, but the two are not mutually exclusive, nor are they always helpful in framing the debate. The moral case is strong but can be hampered by subjectivity and a misguided debate about meritocracy.”

More than half of FTSE 350 companies have exceeded the 33% target set by the Hampton-Alexander Review in 2016. However, in 2020, 59% of FTSE 350 companies did not meet the target set by the Parker Review of having at least one director from an ethnic minority background. While ethnic diversity remains too low to support much quantitative analysis, it does appear that increased ethnic diversity prompts a reduction in shareholder dissent.

“I want to see boards invest time and energy in making diverse appointments not to achieve a target but because it will have a positive impact on their business. The UK Corporate Governance Code makes it clear that board appointments should promote diversity and we want to see nominations committees reporting on progress,” Thompson added. 

Despite clear progress since the first Hampton Alexander Review was published five years ago, the fact remains that much remains to be done. The final Hampton Alexander Review on FTSE women leaders published in January reported that only 14% of the executive directors in the FTSE 100 are women. More worryingly, it highlighted a 34% attrition rate among females at Exco and direct report level. At the same time, EY analysis into the requirements of the FRC corporate governance code found that just 12% of the FTSE 350 report on D&I.

Sue Vinnicombe CBE, Professor of Women and Leadership at Cranfield School of Management, said despite being a very elegant report, the findings didn’t tell us much that we didn’t already know. “There are lots of interviews with board directors on how diversity impacts board dynamics, culture and effectiveness - we talked about this in our 2017 Cranfield University report, based on interviews with board evaluation consultants, who arguably are able to provide a more balanced view than individual directors of boards.”

Vinnicombe said that while the report also claimed to demonstrate that gender diverse boards perform better financially, we had yet to see the business case set out for an all-white male board. “Overall, the research is well conducted but the research questions are not really relevant in 2021,” Vinnicombe said. 

“This is a missed opportunity because we do have some outstanding research questions to answer like does having a critical mass of women on the board impact gender diversity across the organisation, why haven’t women progressed more into both executive roles and key leadership roles on the board and is having one director of colour on the board going to make a difference when we have argued that we need a critical mass of women on the board to make a difference?”