By Daniel Hunter

As Lord Davies prepares to report on the progress made over the last year against the key recommendations made in his review Women on Boards, shareholders are stepping up pressure on companies for greater board diversity as part of a drive to boost good governance.

Developing more diverse boards through a best practice, business-led approach, relies on shareholders and boards of companies to engage on this matter. As part of the next stage of the 30% Club’s campaign to increase diversity on boards, and to help provide a framework for engagement under proposed revisions to the UK Corporate Governance Code, the 30% Club Investor Group has published some best practice guidelines for investors to engage with companies on this issue.

Commenting on the best practice guidelines, Emma Howard Boyd, Sustainable Investment and Governance Director at Jupiter Asset Management, and Chair of the 30% Club investor group said:

“Investors are looking for companies to diversify their boards because they want to see better-run businesses, and as large shareholders we have the clout to effect change. We would strongly prefer that the debate continues by furthering best practice through a business-led approach. Our best practice guidelines set out to achieve this by providing a framework for engagement for both shareholders and companies.

“We acknowledge that there will be no ‘one size fits all’ approach and that companies and boards must be able to take the approach that they feel is most relevant to their company and explain why this is the case to their shareholders. We also recognise that if companies fail to address the issue we must be prepared for legislation and the imposition of quotas in the UK as we have seen elsewhere in the world.”

The UK’s Financial Reporting Council (FRC) states that “diversity, in all aspects, serves an important purpose in connection with board effectiveness”. Importantly the FRC has made changes to the UK Corporate Governance Code which reflect the view that gender diversity strengthens board effectiveness by reducing the risk of “groupthink”, making fuller use of the talent pool and keeping companies in touch with their customers.

The new provisions on diversity will apply to financial years beginning on or after 1 October 2012. However, the FRC has urged companies to demonstrate progress as quickly as possible.

Framework for engagement under proposed revisions to the UK Corporate Governance Code

Shareholders

• Build boardroom diversity, including gender, into engagement and corporate governance principles.

• Include discussions on diversity in engagement on board effectiveness and the evaluation process.

• Challenge on board oversight of the pipeline of talent being developed within the organisation to encourage a widening of the talent pool.

• Encourage companies to engage during the recruitment process to sound out the views of shareholders on present board structure and valuable attributes of new appointments.

• Actively seek disclosure on processes and targets for how companies develop diversity throughout the business.[5]

• Consider voting positions on the chairman and the chair of the nominations committee if, in spite of engagement, diversity is not being appropriately addressed over time and reporting is continuously poor.

• Encourage corporate governance research providers to flag up diversity as a material factor.

Companies

• Consider the benefits of diversity, including gender, to ensure a well-balanced, representative and effective board.

• Provide clear statements on the steps taken by the nominations committee to achieve diversity in the boardroom and throughout the organisation and openly discuss the issues and challenges faced.

• Ensure that achieving diversity of perspective is a key objective in appointing board members and widen the search for non-executive directors, broadening traditional talent pools when making board appointments.

• Wherever possible, set measurable objectives, targets and other steps being taken to promote gender and other diversity, particularly at senior management level. Illustrate your successes in diversity by better disclosure.

• Encourage senior personnel to serve as non-executive directors at other companies to broaden the talent pool.

• Report on supply and demand of female representatives within the organisation and on the board.

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