The Culture Series: Diversity and inclusion is a key aspect to an organisation’s culture – but what is expected of businesses?

In December 2018, Christopher Woolard (the FCA’s Executive Director of Strategy and Competition) commented that a firm’s approach to diversity and inclusion can tell us a lot about its culture.  He also questioned whether there is a link between a company’s lack of diversity and misconduct.  Regulators are increasingly focused on what firms and organisations are doing to promote D&I or I&D, but they are yet to reveal exactly what they expect businesses to do in practice.

As I discussed in my previous blog post, we are increasingly seeing issues, such as culture and D&I, which have historically been considered HR or personnel issues, elevated to board and management level. The FCA now says that diversity has moved beyond being a ‘nice to have’ – although I think, in reality, this has been the position for most businesses for some time.

The benefits of having a diverse workforce have been well endorsed in recent years. In particular, we have heard about the advantages of having different opinions, ideas, ways of working, life experiences, social backgrounds and cultures for businesses to draw from. The 2018 report by McKinsey, ‘Delivering Through Diversity’ , is worth a read. This is not just about gender, sexual orientation and race. In fact, the nine protected characteristics in the Equality Act are not truly diverse enough and D&I goes much further (see Laurie Ollivent’s previous blog post on this topic).

As Christopher Woolard acknowledges, the financial services sector is making strides to better its gender diversity, but there is still very little focus on social mobility. This is not something unusual to the financial services sector and not something that can be changed with a short-term plan.

Whilst many organisations are taking steps to address D&I and put in place D&I initiatives, research and statistics show that there is still a lot of work to be done. This work will likely be further prioritised as the FCA and other regulators are increasingly vocal about it.

In light of the work to be done, Christopher Woolard has gone as far as to question whether there is a link between a company’s lack of diversity and misconduct.  As a result, the FCA is intending to explore the relationship between diversity and firm behaviour, to understand if there is a causal link between the two. I believe that the causal link is between culture and conduct, culture and D&I. It all comes back to culture.

The FCA have made some clear and bold statements, including,

“Our message to firms is clear: non-financial misconduct is misconduct, plain and simple”,

“the way firms handle non-financial misconduct, including allegations of sexual misconduct, is potentially relevant to our assessment of that firm, in the same way that their handling of insider dealing, market manipulation or any other misconduct is”.

Christopher Woolard has made clear that the FCA will be regularly asking firms about their D&I efforts in their engagements with them.

However, without clear guidance I still struggle to understand exactly what the FCA’s expectations are, and how it expects organisations to act. On the one hand, the FCA says that the way in which a senior manager approaches issues of D&I may be relevant to the FCA’s assessment of that person’s competence and character – which clearly elevates D&I to being a personal issue as well as a business issue. However, the FCA are yet to give any real guidance about how the existing rules and regulations should be interpreted to include issues relating to culture, D&I and non-financial misconduct for firms and organisations to know what the expectations are.