Private companies and listed firms now rely on consistent diversity and inclusion data collection for their investors, while regulators look set to push the principles of inclusion.
The inclusion and diversity principles can be realised through remuneration policies, positive inclusion and acknowledging the science behind the decisions.
"I don’t need to justify or make the business case for it,” says Gurpreet Manku, Deputy Director General at the British Private Equity & Venture Capital Association. “It isn’t just venture capital and private equity firms that are asking for diversity and inclusion data, it is their own investors too. And so the data is really important, crucial even."
In the UK, the Financial Conduct Authority (FCA) is proposing to change listing rules for businesses, which will require companies to meet diversity targets, and publish diversity data on their boards and executive management. ICAEW has responded to this consultation.
Firms will also have to navigate the lines in the sand on conduct, integration and ESG principles as laid out in the Financial Reporting Council's Stewardship Code.
'The regulation is not a silver bullet for best practice, but it’s something that can get companies to start thinking about thinking about what they are doing and why,” says Katerina Joannou, Manager, Capital Markets Policy, Corporate Finance Faculty, ICAEW.
“Systems being used should have consistency, either across the regulation or from year to year - any standard needs to avoid the massaging of numbers, or include in the reporting the basis of calculating from year to year.”
As well as the FCA consultation for listed companies, there is also a wider discussion paper in play concerning diversity and inclusion in financial services, to which ICAEW has responded, and the BVCA.
Inclusion is the real goal for regulators, then data, and third is persuading behavioural change from “incumbents and detractors”.
The regulators (the FCA, PRA and Bank of England) write in their current discussion paper that remuneration is slowly becoming linked to diversity and inclusion for senior management. The BVCA’s Manku sees remuneration already linked to gender equalisation in firms.
“The financial services firms that have signed up to HMT’s Women in Finance Charter already have this link to remuneration as part of their requirements,” she says. “There are firms who are already adjusting their approach in advance of the regulation."
The Harvard Business School has suggested boards create novel remuneration systems for ESG requirements where boards could still have overriding authority as appropriate, with share based awards subjecting the payment to variable accounting. Third parties could have oversight to maintain credibility, suggests the paper.
Deloitte research has examined some of the psycho-social influences behind how we group together and think, understanding which is the key to inclusion becoming a success.
People choose friends who are much like themselves in a wide array of characteristics: age, race, religion, socioeconomic status, educational level, political leaning, pulchritude rating, even handgrip strength.
Scientists have found that friends’ brains react similarly to stimuli, and the tendency to associate with similar individuals, homophily, is counter to inclusion. The challenge for boards is to be mindful of this bias while managing their firms for inclusion purposes.
You can read more here: What will make the difference on diversity and inclusion in financial services?
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