REUTERS | Dominic Ebenbichler

Parker Review on ethnic diversity: thinking points for unlisted companies and other organisations

The final report of the Parker Review Committee was published on 12 October 2017. Although the report does not make any concrete proposals in relation to extending its recommendations beyond listed companies, it does contain some practical tools for thinking about diversity that will be of interest to all organisations, not just those directly touched by the report’s recommendations.

The Parker Review positions achieving ethnic and cultural diversity as a moral and commercial imperative, vital for economic success in the UK. Launching the final report, Business Minister Margot James said:

“People from different backgrounds bring different experiences and perspectives, and it’s long been recognised that greater diversity in the boardroom can help create constructive and challenging dialogue …. Businesses of all sizes need to take positive steps to ensure they are not seen as out of touch, to demonstrate that they are operating for the benefit of the many, not the privileged few.”

Nevertheless, the report does not recommend using the power of regulatory change to compel action on this critical issue. The committee held back from such recommendations because:

“The business representatives among us were clear that such compulsion would be strongly resisted by most of their members, and that valuable energy would be wasted debating unrealistic proposals, rather than focusing on more promising recommendations.”

Instead, the report makes recommendations for FTSE 350 companies to adopt voluntary improvements in three key areas (overall quotas, pipeline development and disclosure), with the caveat that if only limited progress is made on a voluntary basis, regulation may be necessary in the future.

Action for “every part of the business world”

The focus of the recommendations is on ethnic and cultural diversity at the highest level in our largest companies but there are some brief glimpses in the report of an acknowledgement that a broader approach is needed. For instance, in discussing the decision to focus on voluntary change the report states:

“During the course of this Review, we were persuaded that every part of the business world, if not already committed to action to increase diversity in leadership, can see both the commercial and reputational advantages to making progress.”

This was true not just in terms of building a diverse leadership team but also in considering how organisations might create a culturally and ethnically diverse talent pipeline, in relation to which the report notes:

“Although not the focus of this Review, we cannot emphasise enough how important it is for Boards of all UK companies to focus on employee development and their executive pipeline with an enhanced focus on ensuring appropriate representation from minority ethnic candidates, as well as other relevant diverse cohorts.”

The obligation on all companies to foster diverse talent secured widespread endorsement in consultation. There were also some calls from respondents to the consultation in favour of broader formal recommendations. In relation to feedback from the consultation version of the report published in November 2016, the final report states:

“Most commentators felt that the scope of the Recommendations should not be restricted to the FTSE 350 and should be applicable across all companies in the UK since diversity is of fundamental importance for all. In addition, there was a desire to see the Recommendations adopted across the Third Sector and the Public Sector, as they should be seen to be taking the lead on inclusion and diversity, and also have a role to play in preparing candidates for roles in commercial organisations.”

Endorsing diversity for all

The Parker Review Committee unanimously supported the recommendations of the McGregor-Smith Report on “Race in the Workplace”, which was published in February 2017.  Among other things, the McGregor-Smith Report recommended  that all businesses that employ more than 50 people should identify a board-level sponsor for all diversity issues, that listed companies and all businesses and public bodies with more than 50 employees should publish five-year aspirational targets and report against these annually and publish a breakdown of employees by race and pay band.

In talking about the McGregor-Smith Report’s recommendations, the Parker Review report states:

“The Steering Committee would welcome any progress that can be made to embed a culture of inclusion and diversity in all UK-based organisations, whether public, private or third sector. Furthermore, the Steering Committee believes that an integrated and coordinated approach to these issues is ultimately the best approach to engage and support business across the UK, including those that comprise the FTSE 100 and FTSE 250.”

Takeaways for organisations outside the FTSE 350

Taking a step back from the Parker Review to look at the picture as a whole, it becomes clear that all organisations are being given a strong steer that they need to be thinking about diversity, if they are not doing so already. Organisations beyond the FTSE 350, particularly those in the public eye such as large unlisted companies, public sector providers and third sector organisations, may not be caught by the specific recommendations but will still need to find a pathway to increasing their diversity.

In terms of formal guidance, organisations can look to both the Parker Review and the McGregor-Smith recommendations to provide some handrails. This is also an area to watch in the future, as it may be touched by further reports and recommendations. It could also make an appearance in the voluntary set of corporate governance principles for large private companies proposed by the Green Paper on corporate governance.

Practical tools for Boards

Of more immediate use are the appendices to the Parker Review, which include “Questions for Directors” and “The Directors’ Resource Toolkit”, as well as best practice case studies from EY and Nationwide. The questions for directors are based around the UK Corporate Governance Code, and are aimed at assisting Boards considering eight key questions in the context of addressing ethnic diversity.

However, the questions are of relevance to management teams generally and could be used or adapted to structure and direct management thinking at any organisation, or even for teams within organisations.  One particularly useful feature is the list of “red flags” that could be used to help identify areas for focused improvement.

The toolkit includes a roadmap for change that could be considered and adapted to scale by other organisations, as well as potentially providing a framework for management reporting and a benchmark against which to measure progress.

Finally, there are the case studies, aimed at tackling some of the specific challenges organisations face and providing an illustration of key techniques. Neither of the featured case studies relates to a FTSE 350 organisation and one isn’t even a listed company.

Our largest companies may not be the trailblazers we deserve in this area yet, but all organisations can benefit from the tools that have been developed to help them focus on ethnic and cultural diversity.

Practical Law Sara Catley

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