Gender Balance on Corporate Boards

Keith Vaz Excerpts

Monday 7th January 2013 Commons Chamber

[Matthew Hancock]

My hon. Friend makes a good point. A number of objections have been raised, and that adds to them.

[Keith Vaz (Leicester East) (Lab)]

I am grateful to the Minister for giving way so early in his speech. Has he received any document from the European Union about the wider diversity of our industry and business—for example, ethnic diversity? I fully support the proposals for gender diversity, but it is important to understand that this country and Europe have changed. The ethnic minority communities are not represented on the boards of FTSE companies, but we would like them to be.

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[Matthew Hancock]

I have not specifically done any research into that, but it is certainly true that since 2010 there has been a big increase in the numbers. However, I do not think that this is a particularly partisan issue because there is cross-government and cross-party work on trying to make it happen. Crucially, we are following a voluntary business-led approach, because the research shows that diverse boards are better boards.

That brings me to the broader point that was made by the right hon. Member for Leicester East (Keith Vaz). The best boards have a diversity of human behaviour and experience and there is no bigger determinant of an individual’s behaviour than their sex. On average, companies with the most balanced boards out-perform companies with no female board members by an average of 56%, and companies with three or more women on their boards have achieved a return on equity about 45% higher than the average company. Research suggests that just one female director on a board cuts a company’s risk of insolvency by around 20%.

[Keith Vaz]

I hope the Minister will agree that the message needs to come from the Government themselves. I had many discussions with previous Prime Ministers about the diversity of their trade delegations to countries such as India. I understand why the Minister wants to go down the voluntary approach route, but will he give the House an undertaking that the Government will also send out a very clear message in the appointments they make to non-government departments and in the delegations that he and other Ministers lead by ensuring that they are representative of our country: more ethnic minority people, more women?

[Matthew Hancock]

Yes, I do agree, but these things have to be done on merit. As it happens, later this month I am leading a trade delegation to India, and the business side of that trade delegation will be led by a woman. I hope that I have satisfied the right hon. Gentleman.

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[Mr Chuka Umunna (Streatham) (Lab)]

Before I discuss the substance of the motion, it is important to make three brief observations for the record.

First, today we debate the need for greater gender balance among those in positions of leadership in business, but in so doing this House and the Government should acknowledge their own failings in this area. Just 22% of the current Members of this House and just four—18%— of the Cabinet are women. That is a disgraceful state of affairs in 2013. Labour Members are proud that 33% of the parliamentary Labour party and almost 40% of the shadow Cabinet are women, but we all need to do better. By all means we should debate the matter, but we in this House are certainly in no position to lecture.

Secondly, the subject of the motion is gender balance, but, as my right hon. Friend the Member for Leicester East (Keith Vaz) said, it is important to note that there is woeful under-representation on company boards in other respects that must be addressed too. For example, according to the latest research from Cranfield university, just 5.7% of FTSE 100 directors are drawn from an ethnic minority while the new census figures indicate that 14% of the population is now from a non-white background. How can we inspire young black and Asian Britons to reach for the top when they see so few people who look like them in our boardrooms, never mind here in Parliament?

Thirdly, diversity in executive directorships also matters, as does the diversity of the boards of directors of non-listed private companies. I think that Sir Richard Branson has made that point, too.

We cannot stand idly by on other issues of representation in the leadership positions that people hold in modern Britain. Today, however, we are bound to focus on the issue of gender balance among non-executive directors of listed companies, because that is the subject of the draft directive and the motion.

Two central questions flow from the motion. The first is whether we should take action, and if so what sort, in relation to the gender balance on the boards of listed companies. The second is whether that action should be taken at the level of the European Union. As the noble Labour Lord and former Business Minister in the Labour Government, Lord Davies, made clear in his excellent February 2011 report “Women on boards”, despite some progress under the previous Government, the representation of women on boards in this country is woefully low, as the Minister has set out today.

In 2003 we set up the Higgs review of corporate governance, which called for greater diversity on our corporate boards. In percentage terms, female-held directorships in the FTSE 100 doubled under the previous Labour Government, but I am clear that we must concede, with regret, that despite that, progress was lacking, with—I think the Minister cited the figure—women holding just 12.5% of FTSE 100 directorships when we left office in 2010. As Lord Davies pointed out, if that rate of change continued, it would have taken about 70 years to achieve some level of parity.

As Lord Davies made clear, there is as much a moral imperative to change this state of affairs as there is a strong business case to do so. The Minister has echoed those sentiments. I do not believe that this is a matter of party political discord.

[Keith Vaz]

I welcome my hon. Friend’s mea culpa in respect of the previous Labour Government. Does he know why we failed to make more of an impact? Was it because of a lack of a message from the then Government to the constituent parts that could have acted upon it, or was it the case, as the Minister has said, that the culture in the business community took so long to change? Is my hon. Friend able to offer an explanation of why we did not do better?

[Mr Umunna]

I think that some of the things that my right hon. Friend has just mentioned may have contributed to the state of affairs when we left office. As the Davies report makes clear, this is an historically complex issue. The easy conclusion to draw would be that our business community has a high level of overt and outrageous discrimination. I know through my own practice as an employment lawyer that, unfortunately, that still exists in some small pockets of the business community. However, I think that there are cultural factors at play and that the issues that women in the workplace face with regard to child care and flexible working all contribute to the lack of progression in the pipeline of appointments in different companies. To tackle that, individuals need to take a lead and have the will to bring about cultural change in individual organisations.

To be frank, one thing for which I do not apologise is our reluctance to move straight towards prescriptive legislative solutions to these problems. I believe that we should regulate or legislate as the last resort, but what has become clear is that, as Lord Davies concluded, there needs to be far more will in the business community, never mind the political community. Another important point that Lord Davies made is that we should be clear about not ruling out taking further action in this House if we do not see enough progress culturally in the business community.

As the report made clear, many of the more than 2,500 responses to the Davies review said that women with the relevant experience were frequently overlooked for development opportunities and that there were differences in how men and women were mentored and sponsored, giving men an edge over their female peers in gaining appointment to boards. We cannot tolerate that in a society that seeks equal opportunities for all, regardless of background. To do an effective job, boards must be made up of competent, high-calibre individuals who offer a mix of skills, experience and backgrounds. I fail to see how our boards can optimise their performance unless they are representative of the population as a whole. After all, in many cases, their customers are the population as a whole. There is a wealth of evidence to back that up, and it is all in the Davies report.

If we accept that the status quo is wrong and believe that it compromises the performance of our companies and our economy, as Opposition Members do, action has to be taken. That is why we endorsed all the recommendations of the Davies report. Those who argue against action often accuse those who argue for it of engaging in tokenism and of promoting diversity over merit. Of course board appointments must always be based on merit, with the best qualified person getting the job, but to suggest that no action should be taken is to presume either that there are not enough women who merit appointment or that there are not enough women who want to be appointed. That flies in the face of the evidence in 2013. There are plenty of women who merit appointment. Diversity and appointment on merit are not mutually exclusive. The problem is that there are barriers and obstacles that must be broken down to ensure that the appointment of women is as usual as the appointment of men.

The Davies report advanced a set of 10 voluntary measures, as the Minister has said, with a view to there being a minimum of 25% female representation on boards by 2015. The Minister went through the most recent update so I will not go through all the details, but there has been not insubstantial progress towards achieving the 25% goal. However, more action is clearly needed if we are to achieve the goals set out in the Davies report. Even if the goal is met, I believe that 25% is a modest aspiration. We should all want companies to make more progress than that. The Government should keep the matter under review and should reserve the right to introduce more prescriptive measures to force faster and greater change if necessary.

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[Alok Sharma (Reading West) (Con)]

As you say, Mr Deputy Speaker, this is a time-limited debate, so I will keep my remarks fairly brief.

I welcome the Government’s work to increase gender balance on boards. As we have heard, the Davies review was a seminal piece of work that helped to identify how not just the Government but particularly the corporate sector can respond to the challenge of having more women on boards and of increasing the diversity of boards. As the Minister said—the shadow Minister made this point too—diverse boards make for better companies, better decisions and ultimately better outcomes for shareholders. That is something for which every company should be striving.

The Government have absolutely the right approach in getting companies to co-operate rather than coercing them into coming up with artificial quotas or targets—and certainly by not forcing legislation on them. The approach is clearly working. A number of colleagues have pointed out that the number of women on boards, both executive and non-executive, has been increasing over the past few years. I suspect that this work will continue. I also commend the Government on the work to increase mentoring, which is an incredibly important part of the jigsaw puzzle in informing not just women but people from ethnic minorities how they can aspire to get on boards and into senior management positions in our companies.

[Keith Vaz]

I congratulate the hon. Gentleman on his appointment as vice-chairman of the Conservative party with responsibility for ethnic minorities, but I am not clear what he is saying, because so far we have failed on ethnic minority representation. Is he in favour of continuing with voluntary arrangements and hoping that things will get better, or does he think that Government and business should send a much stronger message about boards needing to be made more diverse?

[Alok Sharma]

I thank the right hon. Gentleman for his comments; let me come to that point shortly.

I am also pleased that last year the Government introduced a set of draft regulations that will require listed companies to set out the gender breakdown of their work force at board level, in senior management and in the work force as a whole. Normally, those of us on the Conservative Benches are not particularly keen on huge amounts of business regulation, but this is a good regulation, which would not be burdensome but helpful in shining a light on companies and getting them to focus on increasing diversity and, in particular, improving the gender balance on corporate boards. Indeed, the regulations, which are due to be introduced, have already been implemented in a number of other jurisdictions across Europe, so this is nothing new. At the end of last year, the Secretary of State—who is now in his place—urged head-hunting firms to break down the number of individuals they place in senior positions by gender. Again, that is extremely good news.

The right hon. Member for Leicester East (Keith Vaz) made the point about work force diversity. Gender balance is one measure of work force diversity, but ethnicity is another. Championing diversity should undoubtedly be about improving both. The hon. Member for Streatham (Mr Umunna) pointed out that just as there is under-representation of women at senior levels on boards, there is also under-representation of those from non-European ethnic backgrounds. He gave the figure of 5.7%. To break that down even further, research by Cranfield university showed that only 4.4% of board members in FTSE 100 companies are ethnic minority male, while only 1.3% are female. Indeed, of the 48 male directors from minority backgrounds, only eight are British. As has been pointed out, the census showed that the proportion of people from non-white or ethnic minority backgrounds is currently around 14%.

The all-party group on race and community has just published a report—it came out at the end of last year—on ethnic minority female unemployment. Let me set out what it uncovered by quoting briefly from the executive summary:

“Discrimination was found to be present at every stage of the recruitment process—when assessing applications, during interviews, at recruitment agencies and also in the workplace itself. Strikingly, it was estimated…that 25% of the ethnic minority unemployment rate for both men and women could be explained by prejudice and racial discrimination. Discrimination based on name and accent was also uncovered both in data received and from personal testimony.

In addition, it was found that discrimination based on both gender and ethnicity is taking place in job interviews.”

I think all hon. Members today would agree that that is incredibly worrying.

I appreciate the fact that today’s motion is about women on boards, but may I ask the Minister to consider extending the draft regulations for listed companies to disclose their gender balance—which are due to be introduced this year—to include the ethnic balance at senior level, on boards and in the work force as a whole? As for further disclosure that could be considered—this could be part of a voluntary code—perhaps we could ask listed companies also to break down the total number of job applicants, interviewees and new employees they take on every year by gender and ethnicity. That would help to highlight which companies and sectors ethnic minority candidates and women are just not applying to in numbers, as well as which are not giving them any interviews.

I share the view that people should be appointed to jobs on merit and experience. That is absolutely right. The whole idea of artificial quotas is not particularly helpful. However, what I am suggesting for the proposed new regulations is about taking companies one step forwards, towards focusing on what they need to do to increase diversity as a whole in the workplace, whether in the gender or ethnic make-up of boards or in the workplace as a whole.

I will end, as many others want to speak. As we have heard, at the end of the day, diverse boards are much more effective, and they absolutely outperform their rivals—there are reports out there by McKinsey and many others. If a company’s work force and senior management are representative of its customers, it is much more likely to make decisions that respond to their needs and, ultimately, benefit the business. That is a virtuous circle that every company should be looking to square.