How can trustees work towards more diverse boards?

Financial services regulators have been pushing firms for some time to accelerate D&I progress in their workforces. As a result, some will have been well-prepared for September’s consultation papers on diversity and inclusion (“D&I”) from the FCA and PRA.

Nonetheless, in the detail of the papers there are many challenges. One of those is the area of measuring and improving social mobility.

This is an area which has been notoriously tricky to measure and monitor. However, for the pensions sector it could be very important, despite it being marked as voluntary for compliance. 

For many trustees, improvement in this area is not just about meeting regulatory demands. The nature of their role is to understand and represent the needs and requirements of their members and the full spectrum of society.

In this light, trustees, the FCA and PRA are aligned in considering D&I to be crucial to better decision making. In turn, this should lead to better outcomes for scheme members. 

The FCA’s July 2021 discussion paper made clear its expectation that those it regulates look wider than just protected characteristics when considering D&I.

Interestingly it hinted at mandatory reporting on diversity data including socio-economic background. And whilst it is currently voluntary there is a chance that this could evolve into mandatory. 

Asking for this sort of information on social mobility is an ambitious step forward, but it also presents challenges. And for trustees the challenges are unique because of the complex make up of boards and the limited control trustees have over their formation.

Where is the starting line for trustees?

Many trustee boards will recognise when they are disproportionately made up of people from higher socio-economic backgrounds, and they want to move the dial on this.

However, there is a lot of uncertainty around how this can be achieved. 

The issues begin with the unique make up of a trustee board. At least 33% of trustee boards tend to be member nominated.

The trustees themselves may wish to move the dial, but they would have to find a way to encourage more diverse candidates to put themselves forward for selection to the trustee board.  

To achieve greater social mobility through this route there is a significant role for trustees to play in how member-nominated candidates are selected and how these positions are advertised in order to encourage candidates from different backgrounds to apply.

In this regard the regulators have to be cognisant of the unique challenges that trustees face. There is perhaps a sense to focussing on communicating these challenges outside of the pensions industry in order to create a wider understanding, and sympathy, with the issues faced. 

Of course, with the rise of sole professional independent trustee appointments to pension schemes, this is another area to consider.

Professional independent trustees are being used more often by companies, in place of a traditional trustee board made up of company and member-nominated individuals.  This is particularly the case for smaller schemes. This new trend could have a significant impact on trustee board diversity. 

The usual approach taken by sole professional independent trustees is to draw support from their wider team. It will be incumbent on them to ensure that team is diverse including from a social mobility perspective in order to ensure the best quality decision-making.

What trustees can do to fuel their journey?

The entire pensions industry is well versed on the power of data, but some are not harnessing their workforce data to its potential. If we are to become a more diverse and socially-mobile workforce then D&I data will be essential. 

Importantly, this data needs to be comparable, consistent and well-structured across the industry. This means areas and levels of underrepresentation can be identified and strategies developed to tackle it not just within firms, but between them. And because of the unique challenges that trustees have they will need their sponsors and independent trustees to be on the same page. 

The Financial Skills and Services Commission and the Social Mobility Commission outlined several data points of interest:

·       parents’ occupation at around age 14 (which is considered to be the best indicator)

·       the type of school attended at secondary level (including a separate question on fee-paying/independent school attendance facilitated by a 90% or more bursary);

·       eligibility for free school meals

·       family attendance at university for new graduate hires (optional),

A Five-point pathway

The Taskforce suggested a “Five-Point pathway” to help firms across financial services to meet targets. 

1.     assigning clear accountability to senior leaders (ideally one executive sponsor, perhaps linking progress to discretionary pay or other rewards);

2.     collecting data on socio-economic background of staff at all levels by the end of 2024;

3.     monitoring socio-economic diversity at senior levels and what works;

4.     setting organisation targets considering specific contexts;

5.     publishing data and what activities have worked.

In suggesting, not enforcing, the Taskforce – much like the FCA – is dangling a carrot of reputational gain rather than a stick of penalties in front of trustees. 

As the regulators’ diversity papers have now been released, trustees (and their scheme sponsors) will need to consider a strategy to address socio-economic underrepresentation, and consider how it will interact with wider D&I programmes they may have in place.

There is undoubtedly cause for optimism now that the FCA and PRA diversity consultation papers are out. However, identifying, appreciating and publicising the unique challenges for trustee boards, the social mobility issue itself, targets and data needed to move forward is only part of the journey. The next stage of making progress sustainable by working together with all those involved to positively impact scheme members is just up ahead. 

Emma King and Charlotte Cartwright are both partners at law firm Eversheds Sutherland