Why diversity matters in business

At Legal & General Investment Management (LGIM), we believe cognitive diversity in business – the bringing together of people of different ages, experiences, gender, ethnicity, sexual orientation and social and economic background – and harnessing such diversity is a crucial step towards building a better economy and society. So we are using our position to engage with companies who could be doing more, and will vote against the companies who don’t.

We’ve made good progress in improving the gender balance of companies, through engagement, voting and investment consequences. In the FTSE 350, women now hold on average 32% of the board seats compared with just 9.5% in 2010, and in the US there are no longer any all-male boards in the S&P 500.¹

Why does diversity matter?

To most of us, the answer seems obvious. Morally and socially, encouraging diversity creates a more inclusive world. But it can have huge benefits for business too, particularly in a time when competition is fierce, as Clare Payn, Senior Global ESG and Diversity Manager at LGIM explains: “It means we have the best people and the best talent in all teams and at all levels in a business, to ensure that business is sustainable for the future. We’ve got to have that balance to avoid group think, and to avoid risks and opportunities not being considered.”

As set out in our Ethnic diversity report, the McKinsey Diversity Database shows that ethnic diversity is correlated with better financial performance, while research from BCG suggests that companies with above-average diversity scores are more likely to earn higher revenues from  innovative products and services. But despite tangible proof, not enough is being done. Just 64% of FTSE 100 companies have ethnic representation on their boards – the S&P 500 fares better at 92%. Yet although the number of black directors in the S&P increased by 4.5% between 2018 and 2019, the number of companies with black directors decreased by 2.8%.²

We still come across businesses questioning the push for diversity, claiming that people should be hired and appointed on merit alone. “Our answer to that is that they absolutely should be appointed on merit, but you’re more likely to appoint on merit if you broaden your talent pool,” explains Payn. “If you’re only selecting from 50% of the population, how are you going to select the best people? It’s not statistically possible.”

The roadmap for 2021

Until now, we have refrained from imposing voting sanctions on companies with boards that lack ethnic diversity, as there is a lack of transparent data and ethnicity is harder to quantify than gender. However, we believe the time has come to change this, which is why we’ve initiated a new engagement campaign that specifically focuses on FTSE 100 and S&P 500 companies that do not have ethnically diverse directors on the board. (More consideration is needed on how to tackle this in Europe, where regulations restrict the collection of this type of data.) From 2022, we will vote against the chair of their nomination committee or the board if they fail to meet our expectations. “The vote is very impactful, because it’s very personal to a chair,” explains Payn, adding that this initiative will therefore follow a similar format to how we approached and continue to tackle gender diversity.

We’ll be using ISS-assessed ethnicity data, which is data that ISS collects from companies’ public reporting. Where public reporting isn’t available, they’ll look at the biography of board members, their social media profiles – anything that will give them an idea as to ethnicity. “What we’re saying to companies we’ve written to is that you can control the information that’s being reported on you, by self-identifying your individuals,” says Payn, who adds that if the data from ISS is incorrect, companies have every opportunity to engage with the body to clarify and correct their data. In other words, it’s in the hands of the companies.

We know that making changes at board level can take time, so we’ve been very clear to the companies we’re engaging with that, from the start of this initiative, they will have had 18 months to implement these changes. “At this stage we’re only asking for one on the board to represent an ethnic minority. The goal is to see all of the FTSE 100 and S&P 500 having someone with an ethnic background on their board. That would be the ultimate win,” says Payn. “It feels exciting, because it’s happening at a much faster pace than it did with gender. I’m hopeful that we can get there by the end of 2021.”