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What CFOs should consider when it comes to DEI regulations

Will Europe’s new directive improve the gender balance of listed Boards?

Ten years after its proposal, policymakers in Europe have agreed to improve the gender balance of European boardrooms by imposing large, listed companies to have 40% of the underrepresented sex among their non-executive directors and 33% among all directors.

While several European countries have already been adhering to national quotas, this directive will go a step further by creating an EU law designed to increase the number of women on boards across all EU Member States by 2026.

There has long been a call for boards to aim for a 40:40:20 gender balance as a truly representative target for gender diversity. This recognizes that with small or odd numbers of individuals on a board, a 50-50 split is unlikely. Therefore, a representative target is 40% male, 40% female and the remaining 20% naturally fluctuating either way.

In the context of a rapidly changing business and political landscape that has seen diversity, equity, and inclusion (DEI) publicly disparaged, the commercial imperative for DEI not only holds but grows even stronger.

This McKinsey report shows that companies with diverse leadership teams continue to be associated with higher financial returns. This data is true across industries and regions, despite differing challenges, stakeholder expectations, and ambitions. It found that companies in the top quartile for gender diversity had a 39% greater likelihood of financial outperformance versus their bottom quartile peers.

There is also ample evidence to show that diverse boards lead to better decision-making and improved corporate governance and that having a mix of perspectives, skills, and experiences on a board can enhance its effectiveness and performance. When we consider that women drive 70-80% of all consumer purchasing, the case becomes even more compelling as leadership representing women could lead to more market orientation.

Despite the mounting evidence, the share of women in corporate boards is 34% on average in the EU.

Recent research by Cranfield School of Management shows that although female representation in NED roles has grown, women are still struggling to reach the very top positions. Digging deeper, the report highlights a missed opportunity to increase the number of women in the top finance seat over the past two years. There were 28 outgoing CFOs across the FTSE 250 last year. Women were selected to fill only three of these vacated posts.

What’s more, 29 FTSE 100 CFOs have left their roles since 2022, but just eight of those positions were filled by women. Setting a target of 40% women on boards will not only be a major step towards gender equality but also help companies to drive financial performance.

However, in order to create lasting change, we must ensure a broader and more comprehensive approach to DEI.

Diversity and Inclusion is Not a Numbers Game

There is a danger that by using a system based solely on numbers, it becomes all too easy to think of DEI as just another target to meet, which in turn can lead to tokenism. More dangerous even still is that companies might use these targets as a smokescreen to real change and avoid addressing the root causes of inequality, such as unequal expectations on childcare responsibilities, and workplace discrimination.

To unlock people’s potential and reap the commercial rewards of diversity, meaningful cultural change must be implemented. This includes:

  • commitment from leadership
  • building DEI into the core of business strategy
  • running education programs on topics such as microaggressions
  • privilege and allyship; challenging exclusionary behavior and misconduct
  • advocating for DEI initiatives such as employee resource groups, mentoring schemes and supporting underrepresented talent with professional development schemes

In this context the role of the CFO is vital, not just to ensure schemes are supported by budgets and resources but to ensure that DEI measures are viewed and tracked as integral to business success not only beneficial to company culture.

Focus on Transparency not Targets

While mandating quotas and targets might lead to a quick fix to close the gender diversity gap, transparency is essential. Companies that are open and honest about their progress (or lack of), challenges and goals are more likely to build trust and create a culture of inclusion that creates long-term change.

The UK adopts the ‘comply or explain’ approach. All listed companies are required under the listing Rules of the Financial Conduct Authority (FCA) either to comply with a 40% women in leadership target by 2025 or to explain to shareholders in the annual report why they have not done so. This method encourages companies to dig deeper to understand the barriers to progress leading to a shared understanding of inequalities and the reasons behind them.

When companies are forced to be transparent, gender diversity can be more effectively monitored and maintained. This approach has led to hard-fought gains at FTSE 350 level in the UK, however, research shows that 35% of FTSE All-Share firms have not reached the target of having a board made up of 40% or more women and a staggering 88% of AIM companies are falling short of this target.

Whether it’s the carrot or the stick that will drive change, or a balance of the two, what is clear is that progress is stubbornly slow and it is time to up the ante and increase focus and scrutiny. We need companies to urgently act on creating greater diversity at all levels and I for one am intrigued to see how this new EU Directive will deliver on its promise.

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