Women on Boards - European Union Committee Contents

CHAPTER 5: changing corporate culture

88.  The discussion does not end with the case for quotas and the monitoring mechanisms needed to further the argument on both sides. As we made clear at the start, there are a number of possible measures that seek to improve gender diversity on boards. Here, we look at measures to change cultures and practices in the corporate sphere, to gauge whether there are opportunities to build upon existing efforts to deliver change across the EU.

Corporate governance rules

89.  Robust corporate governance rules allow effective scrutiny of companies and are therefore an important means of influencing their behaviour. At EU level, reporting requirements are set out in the Fourth and Seventh Company Law Directives, which require companies to produce an annual corporate governance statement.[161] Both Directives are in the process of being revised and consolidated.[162]

90.  Governance in the United Kingdom is market-based, as set out in the Corporate Governance Code. The Code, instituted in 1992, lays out good governance practices and companies are required either to comply with the provisions of the Code, or to explain in their annual report why they have not done so. We heard that provisions in the Code, such as the recommendation that companies ensure that the posts of Chairman and CEO are not invested in the same person, have proven effective at changing behaviour over time.[163] NAPF in fact considered the United Kingdom's governance approach to be one of the strongest and most effective in the world.[164]

91.  Part of what constitutes good governance in the Code concerns gender diversity, an element enhanced following the Davies review. The Code sets out the importance of diversity in the search for board candidates.[165] In October 2012, it was amended to require the work of a nomination committee to include a description of the board's policy on diversity, including gender, as well as any measurable objectives that have been set and progress against them.[166] Additionally, when evaluating the board, an annual report must now consider the balance of the board, including its diversity.[167] Both of these changes go beyond requirements at EU level and were welcomed by witnesses.[168] This approach to improving gender diversity on boards is by no means unique to the United Kingdom—Denmark, Finland, Germany, Luxembourg, the Netherlands and Sweden all use the "comply or explain" system of corporate governance codes to seek to improve gender diversity on their boards (see Box 2 in Chapter 2).[169]

92.  This approach to governance is a welcome one, providing a strong mechanism with which shareholders and the media can see how well companies are engaging with gender diversity. As the 30% Club stated, the October 2012 changes will "provide a further impetus" in this sphere.[170] Research by the ABI noted that, even before the formal introduction of the changes, 78 per cent of FTSE 100 companies were providing material statements on diversity.[171] Though some witnesses were less positive—the Austrian Federal Chancellery highlighted issues of compliance and effectiveness for similar measures there,[172] and Professor Sylvia Walby noted that the impact of such measures was "widely regarded as very slow"[173]—many witnesses supported the "comply or explain" regime as the best way forward.[174]

93.  One possible role for the EU, therefore, is to embed these concepts in parts of the Union that have not embraced the agenda. Appetite for this course varied. Some called for any EU involvement to be non-legislative in nature. The 30% Club thought that the EU could publish a standard template for disclosure,[175] whilst the ABI thought that action could be taken via non-binding Recommendations.[176] Others opposed EU involvement altogether.[177] For some, though, it was appropriate for the EU to take firm action to ensure consistent corporate governance across the EU.[178]

94.  We see this as a positive area for the EU to take legislative action, especially given the opportunity provided by the revision of the Fourth and Seventh Company Law Directives. We accept, as some witnesses made clear, that changes here cannot guarantee progress on their own. Yet we are confident that the "comply or explain" approach to gender diversity policy, already applied widely in the EU, could play an important part in fostering culture change in corporate life. "Comply or explain" offers, as Spencer Stuart, an executive search firm, suggested, a "balance between the stick and the carrot".[179] It allows for self-regulatory efforts to be properly scrutinised, but does not interfere unnecessarily in the arrangement of governance structures. Member States, of course, would be free to apply more stringent penalties for non-compliance.

95.  Such a regime could include, as Aviva, the insurance group, GC100 and NAPF suggested, provisions for companies to set voluntary targets.[180] PWC cautioned that setting such targets was a complex undertaking, citing the fact that only 38 FTSE 100 companies have done so thus far.[181] We consider the current regime of voluntary target-setting to be appropriate. Where such targets are made, however, companies should be required to update on progress against them. This would build upon voluntary work done by the European Roundtable of Industrialists, which publishes an annual declaration of targets and progress by participating companies.[182]

96.  Making these changes would put gender diversity at the heart of holding a company to account, effecting change along the way. It would also ensure that the media could report effectively on those performers, both good and bad, who are deserving of the spotlight.[183] Sapphire Partners compared these steps to those used to stimulate cultural change on carbon emissions.[184] The issue of gender diversity is just as important in value terms to the EU, and the Commission should be bold in taking action.

97.  To do so would send a strong signal to companies that opening up to rigorous scrutiny is the minimum obligation expected, as well as minimising compliance costs from Member State regimes which could otherwise diverge significantly over time. By using a Directive, it would also respect subsidiarity by offering Member States freedom as to how to implement its requirements. In both senses, action here would be more appropriate than quotas at this juncture and would avoid the perception of a "dictatorial view from Europe" that the Minister was concerned about.[185]

98.  Measures should not extend, though, to limiting the number of board memberships that can be held, as the European Women's Lobby argued.[186] The nature of board membership reflects the conception and commitments of a board role in the Member State concerned. Those conceptions differ widely, so a numerical limit would be too crude. We would prefer the market to make that judgment at a national level, as it does at present.

99.  The Commission should be bold in taking action to promote gender diversity through changes to corporate governance rules. Action would demonstrate leadership, foster EU-wide engagement, and ensure that accountability on improving gender diversity is at the heart of corporate scrutiny across the EU. It would also enable companies to understand better what was expected of them, minimising variation in reporting standards and compliance costs.

100.  We recommend that the "comply or explain" approach to gender diversity policy, as used in a number of Member States and bolstered in the United Kingdom Corporate Governance Code in October 2012, be seen as a good practice example for reference. The Commission should consider including an analogous system by amendment into the draft consolidated Directive on accounting standards currently making its way through the ordinary legislative procedure. If this is not possible, separate legislation should be introduced.

101.  This should require that each listed company disclose, in its annual report, the measures that it has taken on diversity, as well as to report on the balance of its board, taking into account gender diversity in both instances. Furthermore, companies should be encouraged to set non-binding targets for female representation and to report on progress against these objectives where they have been set. This would establish a strong governance regime with the means to allow effective scrutiny by shareholders, the media and policymakers alike, without interfering unnecessarily in national governance structures.

Shareholder engagement

102.  Market change cannot happen without the active engagement of shareholders.[187] In July 2010 the Financial Reporting Council in the United Kingdom recognised this by launching its Stewardship Code, which calls on institutional investors to monitor investee companies, have clear guidelines on their activities, and to report on their stewardship and voting activities. An institutional investor's responsibilities include detailing its policy towards the explanations given by companies under the Corporate Governance Code. The 30% Club has also launched an accompanying set of best practice guidelines. The Code is a clear and sensible guideline for wider cultural change in the industry. It is another welcome development in corporate governance.

103.  Witnesses were divided, though, as to how effectively shareholders are engaging with companies. Lord Davies of Abersoch was most critical: "the stakeholder group that has been slow on this—as they were on pay, as they were on the banks—has been the shareholders themselves. They own these companies. Where were they in the last decade?"[188] He wanted to see a far stronger role taken in the future.[189] Sir Michael Rake, Chairman of the BT Group and easyJet, and Vice-Chairman of Barclays Bank, was also circumspect. He said that historically there was "very little" demand from investors for greater diversity but that engagement was increasing and that "it is beginning to come".[190]

104.  Others felt that shareholders were already working effectively with companies to foster improved gender diversity policies.[191] The ABI said that " … the issue of diversity comes up very quickly in any discussion with a chairman of a board of a quoted company", a reflection of "significant" engagement on the issue in the past three to five years.[192] The most obvious example, he noted, was the adoption of voting policies relating to gender diversity for directors and nomination committees.[193] Similar policies were in place at Co-Op Asset Management and Aviva.[194] Shareholders did not envisage the sanctions envisaged in those policies being used routinely, but rather saw them serving as a backstop to ensure meaningful engagement on the issue.[195] In the same vein, the ABI pointed to its Board Effectiveness Report, which highlighted good and bad practice, as well as its inclusion of board diversity as a metric on its Institutional Voting Information Service.[196]

105.  Overall, we see welcome signs of a recognition of past failures and an intent to institute better practice amongst shareholders. There is an increasing grasp by shareholders of the importance of their role, and the establishment of voting and engagement policies in line with the Code is to be encouraged. However, whilst we hope that these signs are indicative of a broader cultural shift, we know that it will take time. We urge shareholders to match the efforts of the business community following the Davies report.

106.  We would also urge the Commission to examine the case for developing a Stewardship Code across Europe on a voluntary basis. As Liz Murrall, Director of Corporate Governance at the IMA, noted in her evidence, "engagement is not as easy when it is not on your native shores … ".[197] A Europe-wide code, based on similar underlying principles to the one in operation in the United Kingdom, could facilitate engagement considerably. Those principles of transparency, engagement and accountability are broad and of common applicability, and we do not think that cultural factors would limit its role.

107.  Though we foresee the capacity of the Stewardship Code to help in effecting broader cultural change, we suggest that, given its relative novelty, expansion is an option to be explored rather than taken forward at this stage. The Commission's scheduled Communication on EU company law and corporate governance, due by the end of 2012, offers an ideal opportunity do so in its Action Plan.[198] We recommend taking any such expansion forward on the same "comply or explain" basis as we have recommended elsewhere in the corporate governance context.

108.  More fundamental questions of shareholder engagement have been prompted by the publication of the Kay Review of UK Equity Markets and Long-Term Decision Making.[199] Debate has focused on fostering longer-term shareholdings by investors, with a greater interest in the companies in which they invest. Lord Davies of Abersoch referenced this in his evidence.[200] This is an interesting thread of discussion, but one that is beyond our remit given the breadth and complexity of the issues concerned. We would simply encourage the Government to consider whether there are elements of that work that can feed across to their efforts to improve gender diversity on boards.

109.  A more accountable corporate governance regime for companies must be allied to a more engaged approach by shareholders than we see at present. In this respect, we welcome the establishment of a Stewardship Code in the United Kingdom. We also welcome the efforts made thus far in the institutional investor community, such as the establishment of clear voting policies based upon gender diversity. The Government should foster these developments alongside their work with the companies themselves.

110.  Institutional investors often have portfolios that extend well beyond a single country, indicating a possible role for the EU in encouraging best practice. We recommend that the Commission explores, in its forthcoming Communication on company law and corporate governance, how to improve the engagement of shareholders across the EU. Such efforts should be on a voluntary footing, based on the principles of transparency, engagement and accountability that also underpin the Stewardship Code in the United Kingdom. This should be taken forward in conjunction with the Institutional Investor Committee and other European investor associations. We urge the Government to support such efforts.

Fair recruitment: executive search firms

111.  Another important element of changing corporate culture for the better is ensuring that board recruitment policies are fair for both sexes. In the United Kingdom, executive search firms play a prominent role in the appointment of board members. The Davies review thus proposed the establishment of a voluntary code of conduct: the code, drawn up by search firms representing 80 per cent of the sector in the United Kingdom, was launched in July 2011 and, as of the time of the Minister's evidence in October 2012, had 36 signatories.[201] At its core is the idea that searches should be based on skill sets and knowledge rather than experience alone. It establishes seven key principles, ranging from fostering effective succession planning to developing clear skills criteria for candidates. Most prominently, it sets out that search firms should ensure at least 30 per cent of candidates on longlists for board appointments are women, on a "comply or explain" basis.

112.  The introduction of the code was cited by witnesses as one of the key planks of the business world's engagement with boardroom gender diversity.[202] Sapphire Partners stressed that take-up had been "strong",[203] and this positive view was shared by MWM Consulting.[204] Lord Davies of Abersoch asserted that, in the light of efforts following his review, the recruitment sector "is not a problem any more".[205] In doing so, he highlighted the work being done by firms in terms of training, mentoring and development.[206] Dr Karen Jochelson, Director of Employment Policy at the Equality and Human Rights Commission (EHRC), also made reference to these efforts, as well as to the "self-critical" engagement of many firms.[207] Professor Susan Vinnicombe felt that there was "evidence of much better practice emerging— for example, much better interviewing and better specifications for directorships".[208]

113.  Others tempered this enthusiasm. The EHRC pointed to research it commissioned, published in spring 2012, which found that the board appointment process remained opaque and subjective, with a disproportionate focus on the subjective "fit" of a candidate for a board position.[209] This view was shared elsewhere.[210] Mary Honeyball MEP called for "a shift in organisational culture away from the traditional 'jobs for the boys' mindset towards a more open and transparent system of appointments".[211] There were concerns too that searches did not encompass a sufficiently broad base of candidates. Though supportive of their broad engagement with the gender diversity agenda, Lord Davies of Abersoch wanted headhunters to go further; he called for them to be "more creative in their searching".[212] He stressed that firms should extend their searches into the not-for-profit, voluntary and public sectors.[213] Sir Michael Rake felt that firms did not "fish in a sufficiently deep gene pool",[214] which the EHRC felt resulted in search parameters that were "far too narrow".[215]

114.  The establishment of the voluntary search code is nevertheless an undoubtedly positive development. It begins the process of increasing transparency in what is often seen as an opaque world and should be welcomed as a result. Moreover, the spirit of the rules is right: the process of appointment should be transparent, fair and based on intrinsic characteristics. Where companies do not adhere, the best approach at this stage is, as the code sets out, a "comply or explain" basis. This allows a strong voluntary response to a novel framework.

115.  Efforts are being made to expand the reach of the code beyond the United Kingdom. The Government highlighted that the Association of Executive Search Consultants, the global body for the industry, was "looking to push [the code] out through its associated organisations in Europe" with their encouragement.[216] Will Dawkins, head of United Kingdom board practice at Spencer Stuart, made the same point and said that the "answer from the industry would probably be that it is quite a good idea".[217] MWM Consulting agreed; and, in light of the fact that some search markets were newer and less "sophisticated" than those in the United Kingdom, it said that there could be " … even more benefit in enshrining best practices that may be newer in those markets than they are here".[218]

116.  We would welcome this expansion. Both the Government[219] and Dr Ruth Sealy[220] made the point that some countries used search firms less extensively than the United Kingdom. However, search firms often work internationally, placing people across borders.[221] Having clear and co-ordinated criteria for conduct to guide this work can only support efforts to improve gender diversity on boards across Europe, entrenching good practice in emerging markets in the process. The European Commission should place itself at the forefront of efforts to broaden the coverage of a code for search firms, working with the Association of Executive Search Consultants in doing so.

117.  In seeking to expand the code's reach, the opportunity should be taken to strengthen it. A number of the firms interviewed as part of the EHRC's research into the impact of the code felt it was too lenient and we agree.[222] There is scope for a more robust, more detailed code, even on a voluntary basis. There are two main ways in which to develop it.

118.  First, the definition of "intrinsic" characteristics could be improved, as recommended by the EHRC. Spencer Stuart noted that it had its own proprietary system of five "I's" that are sought in candidates—intellectual curiosity, inclination to engage, integrity, interpersonal skills and independent-mindedness.[223] In a similar vein, the code should define more clearly what constitute intrinsic characteristics and how they will be taken into account, rather than leaving them as an abstract concept.

119.  Secondly, monitoring of the impact of the code should be improved, most importantly in terms of the transition of female candidates from longlists to shortlists.[224] In recommending this, we stop short of calling for female quotas for shortlists. This was an idea proposed by Dr Barnali Choudhury, inspired by work within the National Football League in the United States to improve the representation of black coaches. It was opposed by some in the search community: MWM Consulting said that a shortlist quota would lead to "a woman being added just to put a tick in the box, which effectively would be a waste of everyone's time and disrespectful to the female candidates".[225] It felt that longlist provisions were sufficient and were resulting in more female candidates on shortlists.[226]

120.  Though we are sympathetic to the motivations of those who seek a quota for women on shortlists, we consider its introduction premature. We agree that the code should be updated to ask for more from firms and companies, but share the concern that a shortlist requirement, even on a "comply or explain" basis, could undercut work so far because of its perceived proximity to legislative quotas. However, an improved reporting regime should be used as the basis for reviewing the case for further action should existing longlist provisions not lead to progress. This is where the Government must keep pressure up in particular, to show that they are serious about this issue.

121.  Finally, though this process would be particularly valuable, we must not ignore the fact that search firms are ultimately in the service of those who commission them. Lord Davies of Abersoch and the 30% Club acknowledged, despite being positive overall, that the engagement levels of Chairmen have been variable.[227] The EHRC also commented on conservatism in making board appointments, though it noted that the voluntary code had facilitated dialogue between search firms and clients on the importance of diversity, and had improved engagement.[228] A more robust, more widespread code could accelerate and intensify this progress, led by a more energised search community. We urge firms—encouraged by the Government and the EU institutions—to take on that responsibility in the coming years.

122.  Executive search firms play an important role in the process of board appointments in the United Kingdom, and markets for their services are emerging elsewhere in the EU. We welcome the establishment of a voluntary code of conduct in the United Kingdom. It strives for a greater degree of transparency and rigour in a process that is too often narrow and opaque, and sets out key principles of merit-based, open and fair recruitment. It is right that this is being taken forward on a voluntary basis at present. Search firms, and the boards who hire them, should be given the opportunity to demonstrate their engagement with gender diversity before any formal intervention is considered.

123.  We consider, though, that there should be a more widespread code. To start, the principles of the United Kingdom code could be implemented on a voluntary basis across the EU. Any code should encompass firms in emerging markets as well as United Kingdom firms placing candidates on boards in other Member States. We support the work of the Association of Executive Search Consultants in rolling out a code across its partners in Europe; the Government and the Commission should support this work as a priority.

124.  The Government and the Commission should also work with the executive search community to seek to strengthen the provisions of the existing code to ensure that it is a robust guide to best practice. We recommend that the code be amended to include a more detailed statement of what constitutes an intrinsic characteristic, encouraging companies to look beyond the subjective "fit" of a candidate for a board position. It should also include a requirement for firms to report on the numbers and percentages of female candidates making the transition from longlists to shortlists. If the results of such reporting are not satisfactory over the course of the next three years, the Government and the Commission should work with the search community to amend the code to introduce a requirement for there to be a specified percentage of female candidates on shortlists, on a "comply or explain" basis, to ensure that change is sustained.

161   Fourth Directive 78/660/EEC of 25 July 1978 based on Article 54(3)(g) of the Treaty on the annual accounts of certain types of companies; and Seventh Directive 83/349/EEC of 13 June 1983 based on Article 54(3)(g) of the Treaty on consolidated accounts. Both amended by Directive 2006/46/EC of 14 June 2006 amending Council Directives 78/660/EEC on the annual accounts of certain types of companies, 83/349/EEC on consolidated accounts, 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions and 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings Back

162   Council number 16250/11: Proposal for a Directive of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings Back

163   Spencer Stuart Back

164   NAPF Back

165   Corporate Governance Code, provision B.2 Back

166   ibid. Back

167   ibid. Back

168   IMA, Brook Graham, PWC, IDDAS, CBI, EHRC, Q162 (Simon Walker, IoD) Back

169   As Box 2, found on page 12, also indicates, many countries that have pursued legislative quotas, such as Austria and France, also use the "comply or explain" system as an additional facet of their approach in this area.  Back

170   Q271 (Helena Morrissey) Back

171   ABI Back

172   Austrian Federal Chancellery Back

173   Professor Sylvia Walby. See also TUC Back

174   IMA, Brook Graham, PWC, IDDAS, GC100 Back

175   30% Club Back

176   ABI. See also Aberdeen Asset Management Back

177   IDDAS, The Mentoring Foundation Back

178   Aviva, QCA Back

179   Spencer Stuart Back

180   GC100, Aviva, NAPF Back

181   PWC Back

182   European Roundtable of Industrialists, Declaration of voluntary targets: http://www.ert.eu/women Back

183   NAPF, The Mentoring Foundation, Q188 (Kate Grussing, Sapphire Partners) Back

184   Q188 (Kate Grussing) Back

185   Q296 Back

186   European Women's Lobby, Q282 (Sonja Lokar, EWL) Back

187   NAPF, QCA, NEST, CBI, Spencer Stuart, Aberdeen Asset Management, Aviva, GC100, IMA, 30% Club, Q31 (Caroline Normand, BIS), Q90 (Dr Karen Jochelson, EHRC), Q119 (Joanne Segars, NAPF), Q256 (Helena Morrissey, 30% Club) Back

188   Q58 Back

189   Q77 Back

190   Q147 Back

191   CBI, NAPF, Q119 (Liz Murrall, IMA), Q122 (Otto Thoresen, ABI) Back

192   Q122 (Otto Thoresen) Back

193   Q135 (ABI). See also NAPF, Aberdeen Asset Management, 30% Club Back

194   NEST, Aviva Back

195   Q135 (Joanne Segars, NAPF; Liz Murrall, IMA; Otto Thoresen, ABI) Back

196   ABI Back

197   Q123 Back

198   European Commission, Feedback statement: Summary of responses to the public consultation on the future of European company law, July 2012: http://ec.europa.eu/internal_market/consultations/docs/2012/companylaw/feedback_statement_en.pdf Back

199   The Kay Review of UK Equity Markets and Long-Term Decision Making, reported to the Department for Business, Innovation and Skills:

200   Q60 Back

201   The Code is found at Voluntary Code of Conduct for Executive Search Firms, MWM Consulting: http://www.mwmconsulting.com/downloadables/HeadhuntersCode-200711.pdf. The Minister's reference to signatories is at Q299 (Jo Swinson MP) Back

202   Q179 (Kate Grussing, Sapphire Partners; Michael Reyner, MWM Consulting; Will Dawkins, Spencer Stuart). See also IMA, 30% Club, Aviva, ABI, The Mentoring Foundation Back

203   Q179 (Kate Grussing) Back

204   Q179 (Michael Reyner) Back

205   Q77 Back

206   Q53. See also Q191 (Michael Reyner, MWM Consulting) Back

207   Q98, Q100 Back

208   Q214 Back

209   Equality and Human Rights Commission, Gender diversity on boards: the appointment process and the role of executive search firms: http://www.equalityhumanrights.com/uploaded_files/research/rr85_final.pdf Back

210   Q90 (Scarlet Harris, TUC), Q198 (Dr Ruth Sealy) Back

211   Mary Honeyball MEP Back

212   Q74 Back

213   ibid. See also Q156 (Simon Walker, IoD) Back

214   Q144. See also Q145 (Neil Carberry, CBI) Back

215   Q98 (Dr Karen Jochelson) Back

216   Q28 (Caroline Normand, BIS) Back

217   Q179 Back

218   Q183 (Michael Reyner) Back

219   Q27 (Caroline Normand, BIS) Back

220   Q214 Back

221   Q262 (Helena Morrissey, 30% Club) Back

222   Q98 (Dr Karen Jochelson, EHRC) Back

223   Q192 (Will Dawkins) Back

224   Q98 (Dr Karen Jochelson, EHRC) Back

225   Q181 (Michael Reyner) Back

226   Q182 (Michael Reyner) Back

227   Q68 (Lord Davies), Q271 (Helena Morrissey) Back

228   Q98 and Q101 (Dr Karen Jochelson) Back

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