The FRC’s report on Board Diversity and Effectiveness in FTSE 350 Companies tries hard to read the numbers, but John Moulton concludes that diversity will not necessarily improve the bottom line

I might be old-fashioned, but for me corporate performance should still be the biggest concern for companies and their boards. Among other things, addressing diversity has risen near to the top of directors’ priorities.

Before I go any further, I need to make one thing clear – I’m a firm believer that there should be full equality of opportunity for all candidates. Boards should select new members based on their merits and on the board’s view of who would achieve the best outcomes for the company. That gets more difficult when the environment is one where appointing a male to a wholly male board would quite likely attract a measure of public opprobrium.

I’m certainly not in any way advocating that boards should be all elderly males or from any particular background. And I don’t deny the perfectly legitimate views that diversity is a desirable part of a good society. However, what’s not helpful is any pretence that diversity is going to transform corporate performance or that, importantly, where we have seen greater diversity on boards, it’s already delivering better performance.

In July, the Financial Reporting Council (FRC) published Board Diversity and Effectiveness in FTSE 350 Companies. The 132-page report is actually largely qualitative, but to its credit, there are considerable efforts at quantitative data-gathering about larger listed companies. In some quarters, but tellingly not the FRC itself, the conclusion that has been drawn is that diversity ‘leads to better performance’.

Reading the results

There’s quite a substantial discussion in the report itself about the meaningfulness of the numbers. To get even a small proportion of the results to show anything in operating performance or stock price that’s related to gender or ethnic diversity, the normal statistical measure of significance is doubled from 5% (that is, a 5% chance of drawing the wrong conclusion) to 10%. Even so, hardly anything showed any form of significance.

A better reading of the results is that there’s no evidence one way or another that diversity is likely to improve a board’s operation or its effectiveness. And there’s no evidence it has worsened performance either. That more or less of either sex is not a significant or generally applicable factor in board effectiveness is the right reading of this report.

It includes a selection of other previously published academic efforts to assess the performance effects of the gender mix of boards. In summary, they show no clear picture either.

In his foreword, the FRC’s chief executive, Sir Jon Thompson, carefully avoids stating any quantitative conclusions. In fact, he quite clearly states: “Often a correlation is found but not necessarily full causality, and business success can be difficult to pin down.”

An inconclusive outcome

People rarely read 132-page reports, especially those with some fancy statistical algebra that will confound most readers.

In my view, to conclude that corporate performance is improved from the quantitative data reflects a desire to shift social views, letting that roll over inconclusive study results. Good data must underpin DEI (Diversity, Equity and Inclusion) strategies.

The word ‘discrimination’ used to mean careful selection – now it only means a ‘bad thing’. Organisations can fall at the first hurdle of following a strict equality agenda because the language used in job adverts inadvertently puts certain people off. Descriptions such as ‘team player’, ‘good sense of humour’ and ‘lively’ can be used without considering who might be excluded as a result.

The problem is that these characteristics might really matter to a business and its culture. I do wonder what applicants you would get if you advertised for anti-social, humourless, solitary souls. Former regulators perhaps?