Diversity is a finance issue – one that requires all the analytical, governance and management skills the finance function has to offer
Regulators around the world are increasingly taking action to encourage greater diversity within corporate entities. The European Commission, for example, has proposed a directive requiring companies to set the objective of having a minimum of 40% of either gender among their non-executive directors by 2020. Alongside setting targets, governments are increasingly requiring the reporting of diversity data.
In Australia, for example, all non-public organisations with 100 or more employees are now required to provide standardised data relating to a set of gender equality indicators. In the UK, the Corporate Governance Code now requires listed companies to set out their diversity policy in their annual report and report on progress against any measurable objectives they have set themselves.
Businesses need to take action in response, but not just to avoid beaching regulatory requirements. A number of research studies have shown the business benefits of diversity – not only intangibles such as greater innovation, but also bottom line benefits. For example, a September 2014 study by the Credit Suisse Research Institute (based on 3,000 international companies) found that companies where women accounted for more than 15% of senior management achieved an average return on equity of 14.7% in 2013, compared to 9.7% by companies with less than 10% senior women.
In response to regulatory pressure and the mounting evidence for diversity benefits, companies are increasingly announcing their own targets. Lloyds Banking Group, for example, has set itself the goal of 40% female representation at all levels of management by 2020. Many organisations like Lloyds see benefits from having a workforce – including senior personnel – that reflects their customer base.
Diversity isn’t only about gender, of course. As indicated in a recent report by ACCA and the Economic and Social Research Council, Towards Better Diversity Management (see 'Related links'), diversity relates to many different attributes – including gender, age, ethnicity, disability, sexual orientation, and educational and socio-economic background. Even where organisations appear to have a mixture of nationalities or genders in senior roles, those individuals often share a similar background and, therefore, true diversity can still be lacking.
Within individual businesses, making the case for diversity action still remains a challenge. Line managers have other priorities, often under pressure to deliver short-term results when diversity initiatives generally require a medium to longer-term timeframe to have an effect.
Part of the challenge is to show the bottom line impact. This is where finance functions need to be proactive.
‘The expertise of the finance team can help demonstrate the linkages between good diversity management and business performance,’ says Claudia Chapman, head of policy and campaigns at ACCA.
‘The finance function could help diversity managers overcome some of the hurdles to success, such as the pressure for short-term business results and lack of support within the business.’
Finance teams can bring their analytical skills to bear on performance data – for example, looking at sales data to determine whether particular attributes are linked with increased revenue.
Nikki Walker, a diversity and inclusion (D&I) expert from consultancy More2Gain, uses her own finance and operations experience to help companies build their business case for change. One client found that slightly older, female employees were getting the best customer satisfaction scores and taking the highest spend.
‘This analysis caused the company to step back and think about the need to recruit slightly different people, perhaps older, perhaps different genders and perhaps different ethnicities – in order to be able to connect with their customers and drive more value to the bottom line,’ she says. ‘That’s the kind of analysis that makes business leaders understand why they need to invest in D&I.’
Making the business case isn’t only about valuing the upside of action – it should also consider the potential negative impacts of inaction. Walker has seen the first signs of major companies demanding D&I progress among suppliers – or threatening to remove their business.
‘Finance can show the impact of losing a customer on the bottom line,’ she says. ‘That’s what drives change.’ Similarly, failure to meet regulatory targets could generate bad press, damage corporate reputation and ultimately reduce shareholder value.
As well as helping to make the business case, finance can also ensure there is appropriate accountability and governance attached to D&I initiatives. For example, two or three key performance indicators could be included in the monthly management pack sent to the board to report on business performance. This encourages the integration of D&I management with mainstream business management.
‘It needs to be part of the way the business is run,’ says Walker. ‘Finance can help with mainstreaming it.’
Finance functions also need to examine their own practices, including the standard reporting methodologies they require business units to use, to make sure these aren’t impeding policies that could support greater diversity. For example, requiring business units to report performance data based on basic physical headcounts rather than full-time equivalent employees could deter the spread of part-time working.
Looking ahead, the case for diversity is beginning to encompass the concept of the ‘global value chain’. As the ACCA and ESRC report highlights, this global value chain approach involves ‘seeking to redress disparities of power across a company’s operations in different parts of the world’. It also reflects the shift in business and economic power towards emerging markets and away from the mature West.
Alison Maitland, a respected writer on the topics of leadership and diversity, is already seeing leading organisations moving their diversity initiatives to the next level with a more general focus on ‘inclusion’.
‘Among more experienced companies, there is a clear shift of emphasis in the search for what works,’ she says. ‘Instead of, or alongside, programmes focusing on categories of employees – women, ethnic minorities, people with disabilities, etc – these organisations are investing in developing leaders and creating inclusive cultures in which everyone feels valued and able to achieve their potential.’
Some companies have renamed their strategy ‘Inclusion and Diversity’ or dropped the word diversity altogether.
‘Others have renamed such programmes to reflect their emphasis on culture change,’ says Maitland. ‘As many of these companies operate globally, they attribute increasing importance to managers’ and leaders’ possession of cross-cultural skills.’