Women on Boards

Women on Boards

Regulator Assessment: Qualifying Regulatory Provisions
Title of proposal / Women on boards
Lead Regulator / Equality and Human Rights Commission
Contact for enquiries /
Date of assessment / 25November 2016
Commencement date / First published in March 2016
Origin / Domestic
Does this include implementation of a Cutting Red Tape review? / No
Which areas of the UK will be affected? / England, Scotland and Wales
Brief outline of proposed new or amended regulatory activity
The Equality and Human Rights Commission (EHRC) has the statutory role to provideauthoritative guidance on equality and human rights law and good practice, and to help organisations understand what lawful steps they can take to promote fairness and diversity.
With the report of its “Inquiry into fairness, transparency and diversity in FTSE 350board appointments”, the EHRC has published in March 2016 the Guidance “How to improve board diversity: a six-step guide to good practice” (hereafter “the Guidance”). The Guidance sets out practical steps that companies, search firms and recruitment agencies may take to improve diversity in boards. The Guidance specifies what can be considered good practice in the process of search and recruitment of new board members. The Guidance indicates also what may be lawful and unlawful practice, and particularly in relation to any “positive action” that companies and executive recruitment agencies may take in order to improve greater diversity at board level. Among other dispositions, it reminds companies of their ability to use the “tie-break provision” in the Equality Act 2010, which allows treating a candidate from an under-represented group more favourably at any stage of the recruitment or promotion process, from longlisting to selection. The Guidance aims also to improve diversity within senior staff at companies with boards, by suggesting initiatives that may widen diversity in the senior leadership talent pool.
For the sake of coherence, the Guidance references and summarises relevant sections from the Financial Reporting Council’s UK Corporate Governance Code. This assessment references strictly content relevant to the Equality Act 2010 and EHRC’s remit.
Which type of business will be affected? How many are estimated to be affected?
The Guidance will affect businesses with a board of directors and executive recruiters and executive search firms.
Business population estimates are included in the additional information section of this paper. However, while looking at the business population estimates can provide a theoretical upper bound for the number of businesses that will be undertaking activities for which the guidance may be relevant none of those businesses are required to read the guidance, and the guidance does not change the underlying legal requirements with which the majority of businesses are already complying. As such a significant proportion of businesses are likely to already consider they are compliant with the legislation (for example on the basis of previous legal advice) and/or might not be undertaking relevant activity each year or where they do they may also rely on previous legal advice.
The additional information section of this assessment provides further information on the total business population that the guidance could theoretically be relevant to. However, as there is no requirement to read the guidance, and it does not change the underlying legal requirements, a more robust assessment for the number of businesses incurring costs from reading the guidance can be developed by estimating the number of times it has been accessed. This is discussed further in the costs and benefits section below.
Summary of costs and benefits (on the basis of mid-point estimates)
Price base year / Implementation date / Duration of policy (years) / Net Present Value / Business Net Present Value / Net cost to business (EANDCB) / BIT score
2014 / 2016 / 10 / 0 / 0 / 0 / 0
DIRECT IMPACTS

1. Familiarisation costs (i.e. costs associated with reading and comprehending the EHRC’s guide)

Method

• The literature reviewed for this BIT assessment does not provide primary evidence ofthe costs associated with businesses familiarising themselves with this EHRC guidance. However, the costs associated with conducting a survey of businesses to gather such primary evidence would be disproportionate, especially considering that RPC/BRE guidance is available to guide estimation of familiarisation costs for guidance (Draft appraisal of guidance). Consistent with this RPC/BRE guidance, secondary sources have been used to inform the following data parameters underpinning an estimation of familiarisation costs:

- the average cost of the required administrative activity, i.e. familiarisation, (Price), based on the time taken to complete a given activity and the (labour) cost of that time (including the costs if multiple employees are involved); and
- the total number of (familiarisation) activities performed per year (Quantity), based on the number of businesses undertaking the activity and the annual frequency with which they do it.

• To calculate familiarisation costs, a Standard Cost Model (SCM) approach is used. The formula is as follows:

Σ P x Q, where:
P (for Price) = Tariff x Time; and Q (for Quantity) = Number of businesses x Frequency
Assumptions

• As a first impact, it is assumed that the affected business population will incur costs (time/labour) in familiarising themselves with the Guidance, specifically reading and comprehending the Guidance.

• As regards the number of businesses, this is based on figures for web page downloads of the guidance which indicates the number of businesses who have viewed the guidance, for which we have 12 months of data. In those 12 months the guidance was downloaded 107 times, the business population is therefore 107.

• As regards the tariff (average labour costs), an average hourly labour cost of £20.60is used for senior managers.

An uplift for non-wage costs (20.2%) is added to the average hourly labour cost of senior managers. The revised labour cost figure is thus: (£20.60*1.202) =£24.76.

• As regards the number of employees involved in familiarisation, it is assumed that at least two members of the senior personnel (e.g. HR and compliance/legal senior managers) will be reading the Guidance and disseminating relevant changes and / or best practices to other senior employees. This corroborates findings from the Inquiry Report published by the EHRC which reveals that most companies involve a combination of the following employees in the familiarisation of regulations around board appointment process (e.g. the Equality Act 2010): (1) a specialist member of the human resources team; (2) a corporate lawyer; and / or (3) a specialist board member[1]. As for executive search firms, no similar evidence exists. It is assumed that one senior manager will be responsible for familiarisation with the Guidance in these firms.

• As regards time,it is assumed that reading and familiarisation will take 24 minutes for executive search firmsand 30 minutes for companies (or 0.4 and 0.5hours respectively) on the basis of: (1) the word length of the EHRC’s guide (2,400 words for executive search firms; and 3,070 words for companies[2]); (2) the assessed difficulty of the guide’s text (score of 28 on the Fleisch Reading Scale); and (3) the average reading speed for technical texts (100 words per minute[3]) (EFTEC, 2013). This estimated time spent is per employee involved in the familiarisation process.

• It is assumed that this form of familiarisation will be undertaken on a one-off basis.

Calculations of internal costs from reading and comprehending the Guidance in Year 1
The calculations below indicate that familiarisationcosts are around £3k, this rounds to zero for the purposes of BIT.
Number of businesses affected / Number of employees involved / Estimated time spent (in hours) per employee / Average hourly wage / Total
107 / 2 senior managers / 0.5 / £24.76 / £2,649.32

1. Policy costs

The Guidance seeks to aid policy implementation by supplementing statutory and/or voluntary rules includedwithin the frameworks set out by the Equality Act 2010 and the Financial Reporting Council’s UK Corporate Governance Code respectively.This could lead to additional costs for businesses; however the guidance doesn’t add any additional legal requirements. In any case the number of businesses accessing the guidance are so small, the impact is likely to be negligible on an aggregate basis.
INDIRECT IMPACTS

1. Indirect cost to business

Executive search firms could increase their fees to companies as a result of additional policy costs, thus passing throughtheir rise in internal costsresulting from following the recommendations of the Guidance, as calculated in the previous section. These higher fees would constitute a second order impact on companies; they are therefore indirect and have not been included in the BIT score.

1. Indirect benefits to business

We can expect that actions undertaken by businesses to increase board diversity will impact positively on businesses and society as a whole. These benefits of the Guidance, which are indirect impacts, are described below.
Enhancedcorporate governance and decision-making
It is reported that more diverse boards can make decisions more effectively, essentially by reducing the risk of ‘groupthink’ and being able to pay more attention to managing or controlling risks and acquiring a better understanding of the company’s customers[4]. Diversified board members are more likely to possess different personal characteristics, conducive to diverse leadership and thinking styles, risk preferences and behaviours. Such diversity helps foster creativity, notably in delivering solutions to problems and in providing a more comprehensive oversight to the operations of the organisation.
In addition, it is reported that a balanced board will have more representatives of users and customers of its products in the boardroom to make informed judgment. Diverse backgrounds, experience and social networks in the boardroom may thus improve directors’ understanding of the stakeholders, thereby allowing them tomeet stakeholders’ expectations and needs in a more responsive manner.
Enhanced reputation and investor relations
Having a more diverse board can enhance corporate reputation. As such, diversity positively signals to internal and external stakeholders that the organisation lays great emphasis on diverse constituencies and does not discriminate against minorities in climbing the corporate ladder. This may also indicate the organisation’s effort to provide an equal opportunity of employment and management’s eagerness in positioning the organisation as a socially responsible citizen. This reflection can help strengthen the social contract between a business and its stakeholders.
Enhanced corporate financial performance
A number of studies demonstrate strong correlation between corporate financial performance and gender diversity(Department for Business, Innovation and Skills, 2011; McKinsey & Company, 2007; Catalyst, 2004)[5]. Companies that specifically choose to diversify their boards with women are likely to benefit from greater independence, innovation, and good governance which, in turn, ought to help maximize their financial performance. As such,if boards consist of heterogeneous directors, this diversity is capable of leveraging financial growth and success. The 2004 Catalyst report found higher financial performance for companies with higher representation of women board directors in three important measures[6]; notably: (1) return on equity, whereby companies with the highest percentages of women board directors were found to outperform those with the least by 53 percent on average; (2) return on sales, whereby companies with the highest percentages of women board directors outperformed those with the least by 42 percent on average; and (3) return on invested capital, whereby, on average, companies with the highest percentages of women board directors outperformed those with the least by 66 percent.
Please provide any additional information (if required) that may assist the RPC to validate the BIT Score
The total business population that could be affected by the Guidance is estimated to be between 1,700 and 5,900 (rounded to the nearest whole number): between 1,700 and 5,700 companies with boards, and about 200 executive search firms.
Assumptions behind these estimates
Companies with a board of directors
There are no data on the number of companies with boards in the UK. The legislation in the UK on directorships and boards does not impose particular requirements on privately owned companies, which may therefore have a board irrespective of their size, if they choose to. Only listed public companies are required by law to elect a board.
As a result of the above, data from the London Stock Exchange on the number of listed public companies (excluding public sector / nationalised companies) and incorporated in Great Britain provides a lower bound estimate of 1,547 companies.
In the absence of any evidence on the proportion of privately-owned companies that have a board, it is assumed more likely that larger companies will have boards. For the purpose of defining an upper bound estimate, the number of businesses with more than 250 employees is retained. It could be possible to extend that population further by including businesses with more than 200 or more than 150 employees, or to reduce that population further by assuming that only a certain proportion of large businesses have boards. However, in the absence of any data/evidence on UK companies with boards, it is considered a reasonable simplifying assumption to include all businesses with more than 250 employees within the upper-bound estimate of the total number of businesses affected.BPE data indicate that, across England, Scotland and Wales, the number of large businesses (250+ employees) at the start of 2016 was 5,700 (to the nearest whole number).
The number of companies with boards (potentially affected by the EHRC’s guide) is therefore assumed to lie within the range of 1,500 and 5,700.
Executive search firms
In the absence of firm evidence on the number of executive search firms in the UK, anecdotal evidence was gathered from the grey literature and a headhunters register/database available within the public domain (sources: The Telegraph; AllHeadhunters.com). Both sources of evidence indicate that there could be between 170 and 180 executive recruiters in the UK. For the sake of simplicity, a rounded upper bound figure of 200 is applied.
Given the uncertainty associated with the scale of impact, the upper and lower bounds are presented throughout this analysis, as well as a mid-point estimate of affected businesses. The Business NPV, EANDCB and BIT score are calculated and presented using only the mid-point.
Sources

• Companies listed on the London Stock Exchange (LSE) (correct as of 31 October 2016)
• Business population estimates for the UK and regions 2016: detailed tables; Department for Business, Energy & Industrial Strategyhttps://www.gov.uk/government/statistics/business-population-estimates-2016
• AllHeadhunters.com. 'All Headhunters in the UK.' Link:
• The Telegraph, 2014. 'Opinion: Is headhunting industry ready to face up to the threat posed by 'disintermediation'?' Link:

1

[1] EHRC (2016. ‘An inquiry into fairness, transparency and diversity in FTSE 350 board appointments.’ Available at:

[2] The number of words varies by type of business affected. There are sections of the Guidance document that are explicitly targeted at companies or executive search firms and others that are targeted at both. Additionally, references to the Financial Reporting Council’s UK Corporate Governance Code have been excluded from the word count for both types of companies.

[3] This source (EFTEC, 2013) estimates the reading speed for technical texts at 50-100 words per minute (wpm) and for prose at 250-300 wpm. It is assumed reasonable to treat this QRP as a technical text but to take the upper bound of the reading speed (100 wpm), given that the readers will generally be highly educated and senior.

[4]London Business School, 2003. ‘The Tyson Report on the Recruitment and Development of Non-Executive Directors.’ Link: http://facultyresearch.london.edu/docs/TysonReport.pdf; Green Paper – The EU Corporate Governance Framework, 2011;

Women on Boards by Lord Davies, February 2011

[5]Cited in EHRC, 2015. ‘An inquiry into fairness, transparency and diversity in FTSE 350 board appointments.’ Link:

[6]Catalyst.org. ‘Companies With More Women Board Directors Experience Higher Financial Performance, According to Latest Catalyst Bottom Line Report.’ Link: