DEI: How to lead without going offside

Diversity, equity, and inclusion (DEI) are boardroom agenda items. Whilst much of the focus has been on achieving greater board diversity, the spotlight is increasingly moving towards the board’s responsibility for the organisation’s overall D&I strategy.

In a challenging landscape, with a variety of attitudes towards DEI being expressed by stakeholders, and legal limitations on what actions can lawfully be taken to improve DEI, how do boards safely drive change from the top? To what extent should boards intervene or let change happen organically?

Applying a DEI lens to all decisionmaking may be the only authentic way for boards to achieve meaningful and sustainable change in DEI, whilst mitigating the potential challenge of positive discrimination and avoiding the meritocracy trap.

The challenging landscape

The current landscape for prioritising action to improve corporate DEI is more fragmented than ever before. To make sound, well-informed decisions in this area, boards must be alert to the battle of forces at play.

• At a societal level, organisations and their business leaders are expected to prioritise DEI but are also facing conflicting views characterising DEI as ‘wokeness’ or raising concerns over misplaced priorities on DEI at the expense of profit and stakeholder interest.
• At a legal level, employers are permitted to take positive action to achieve progress on DEI but must do so in an environment of increased scrutiny and heightened legal risk of claims of unlawful positive discrimination.
• At a regulatory level, DEI is increasingly becoming part of the supervisory and enforcement framework. In the UK, for example, the financial services regulators have recently published proposals making clear that boards should be responsible for oversight of a firm’s DEI strategy.
• At a political level, DEI is a common policy issue and used to differentiate ideologies of politicians across the political spectrum, with new proposals either to accelerate or reverse DEI strategies and protections for disadvantaged groups being championed, any of which will have long-term impacts for businesses.

In such challenging times, what can boards do?

Targets: Though an effective tool to drive forward short-term progress on DEI, targets can also carry greater legal risk. Many listing regimes already require in-scope companies to report against targets on the representation of women and ethnic minorities on their boards and executive management, and many organisations set voluntary targets or commit to diversity benchmarks to improve short-term DEI. While the setting of targets themselves is not unlawful, the measures firms take to achieve them can be if targets are in fact treated as quotas rather than aspirational goals.

Incentives: Many organisations already use nonfinancial metrics linked to DEI in their performance and remuneration assessments. Whilst doing so can demonstrate business leaders are taking DEI seriously, it is difficult to translate DEI metrics into short- and medium-term remuneration targets, and setting remuneration policies which link directly to the achievement of DEI targets may also have the effect of incentivising behaviours which could be seen as positive discrimination. The challenge of setting stretching, but not too stretching, targets has also led many business leaders to consider longterm shareholding as a better alternative to achieve sustainable progress on DEI.

The gift of time: Over the next generation, a broader cohort of diverse candidates should, in theory, be climbing the corporate ladder and entering the talent pool at firms which foster healthy cultures of inclusivity and equality. The focus by boards should not, therefore, just be on short-term diversity progress, but long-term initiatives necessary to nurture the next generation of talent coming through the ranks. Boards are instrumental in developing the right environment and culture for this.

The DEI lens: Ultimately, there are tools which boards and senior leaders can use to intervene and drive short-term results in DEI. But efforts may be futile unless a board’s mindset on DEI is applied holistically and embedded within an organisation’s governance framework. From acquisition to risk management, to policy, finance and succession planning, to managing strategy and performance: applying a DEI lens to all decision-making may be the only authentic way for boards to achieve meaningful and sustainable change in DEI, whilst mitigating the potential challenge of positive discrimination and avoiding the meritocracy trap

FIVE FOCUS AREAS FOR BOARDS AND GCS TO CONSIDER

1. Social mobility: Organisations are increasingly recognising the need for workplace diversity initiatives to cover socio-economic backgrounds. Expect greater focus on socio-economic diversity of boards in the coming years.
2. Diversity shortlists: Be watchful of relying on candidate shortlists based on diversity strands. Such measures have become common practice but carry great legal risk and may be unlawful.
3. The regulatory spotlight: DEI is increasingly becoming a regulatory concern, as regulators recognise that good diversity and inclusion practices promote healthy cultures, sound risk management, reduce groupthink and facilitate better decision-making. Whilst changes to legal frameworks can take time to come into force, regulatory change can happen quickly.
4. Positive action vs positive discrimination: The assumption that well-intentioned measures designed to correct historic unfairness will be lawful has never been a safe assumption, and as challenges of positive discrimination become better known and more prevalent, understanding this often blurred line has become ever more important.
5. The political agenda: DEI is increasingly becoming politicised and used to frame party manifestos. In the UK, for example, Labour, the current opposition party, has already committed to mandate ethnicity pay reporting if it makes it into government, alongside a new Race Equality Act, enabling minority ethnic and disabled workers to bring equal pay claims.