Beyond “one and done”: new ethnic diversity targets from the Parker Review

On 14 March 2023 the Parker Review Committee published an update report, Improving the Ethnic Diversity of UK business. The report notes progress against the Parker Review’s ‘one by 2021’ and ‘one by 2024’ boardroom ethnic diversity targets for the FTSE 100 and FTSE 250 respectively. As at the end of 2022:

• The FTSE 100 were still falling short, with 96% of FTSE 100 companies having at least one minority ethnic director.
• The FTSE 250 are at 60% compliance, with just under two years to go until their December 2024 deadline.

The report notes there has been “remarkable progress” towards achieving the targets, and has “real hope” that the full FTSE 350 target will be met in 2024.

However, the report also highlights some issues in the context of FTSE board ethnicity representation. These include:

• The great majority of ethnic minority directors (169 out of 190) are in NED roles.
• Companies risk underutilising their minority ethnic talent. Setting board targets alone can lead to an approach whereby compliance with public targets is prioritised over meaningful diversification at more junior levels, and companies compete for an established but limited pool of ethnic minority directors.
• Progress will be aided by improved data on the outcomes of different ethnic minority groups.

With these challenges in mind, the report outlines a new expanded scope for the Parker Review.

Senior management targets

The Parker Review is now asking FTSE 350 companies to set their own targets for ethnic minorities within their ‘senior management’ group (consistent with the approach taken by the FTSE Women Leaders Review this is defined as the Executive Committee or equivalent and those senior managers who report directly to them, although companies can use a wider definition) and report on the target in their annual reports from 2024 onwards.

Why target senior management? The report notes that “the board represents a very small portion of a business, and in some cases the board and its culture can be one step removed from the culture of the wider company. In addition, the diversification of the board can be achieved through the appointment of non-executive directors rather than the development of a pipeline of internal talent for executive roles.” The hope is that setting ethnicity targets for senior management will increase the likelihood of equal access to opportunities for minority ethnic executives across the wider business, and avoid the potential “easy win” of NED appointments that may not represent overall diversity in the organisation.

Private company targets

Following the success of the FTSE Women Leaders Review in targeting this cohort of companies, the Parker Review will also be asking 50 of the UK’s largest private companies (LPCs) to provide information about their ethnic diversity. These LPCs will be expected to have at least one ethnic minority director on their main board by December 2027, and to provide targets for the percentage of ethnic minority individuals within senior management (in the same way as is proposed for FTSE 350 companies). The Parker Review will start to collect this data in its 2024 survey.

Improvements in ethnicity data

The Parker Review is also encouraging companies to enhance the quality of their ethnicity data by encouraging as many of their employees as possible to self-declare their ethnicity. The report includes best practice recommendations, noting for example that greater transparency by companies about their ethnic diversity objectives, particularly when these are linked to their strategic ambitions, should help build the level of trust required for employees to provide self-identification data to their employers.

The Review proposes that companies aim for a minimum rate of 80% ethnicity self-identification reporting, and encourages companies to record in their annual reports the percentage of their employee population who have self-identified and shared their ethnicity data with the company. This would be a significant change if adopted; a recent CIPD survey revealed that only 22% of the FTSE 100 reported the ethnic breakdown of their workforce. In addition, a lack of sufficient ethnicity data has proven one of the challenges with employers adopting ethnicity pay gap reporting (although the Parker Review is silent on that particular type of reporting).

Challenges for employers

The report’s recommendations will undoubtedly lead to a greater focus on ethnic diversity amongst the FTSE 350, and the newly in-scope LPCs. However, when deciding what new steps may be needed to meet these recommendations, employers need to be mindful of the ‘positive action’ provisions of the Equality Act 2010 (EA 2010). These provisions permit employers to take certain proportionate steps to enable greater participation in an activity by employees from ethnic minorities, if specified criteria are met. Setting targets for increased participation is one of the positive action steps recognised by the Equality and Human Rights Commission’s Code of Practice, and it was also a key recommendation of the McGregor-Smith report (‘Race in the workplace: the McGregor-Smith report’) back in February 2017. Employers should however remember that targets are inherently different from quotas; the former is likely defensible under the Equality Act 2010, the latter is likely not (since it risks straying beyond permitted positive action and into unlawful discrimination).

The bigger question posed by the report is how employers can go about seeking to meet their targets for ethnicity representation? The Parker Review also strongly encourages companies to describe in their annual reports the management development plans that they have in place to encourage and support achieving a diverse and inclusive pipeline. When formulating those plans, employers need to ensure they stay within the boundaries permitted by the EA 2010. That legislation does potentially allow employers to treat ethnic minority candidates more favourably as regards recruitment or promotion, but only where those candidates are “as qualified” as white candidates. Employers have traditionally been very wary of taking this approach, given the inherent difficulties in showing that two candidates are “as qualified as” each other. Falling foul of these provisions exposes the employer to race discrimination claims from white candidates who feel they have been unfairly overlooked in favour of ethnic minority candidates. This is an area of law where reform has long been called for, to enable employers to feel more confident when advancing their diversity, equity and inclusion agendas.