Is a business case needed to create an inclusive culture at work?

In the absence of legislation mandating minimum standards for inclusiveness and diversity in UK workplaces, many organisations need economic business reasons to validate changes.

The moral case for organisations to create inclusive cultures is generally accepted by employers when questioned.

However, many fail to then take action to implement such cultures in their organisation. There is, therefore, a need for strong business reasons to create inclusive cultures, which will persuade boards and business owners to take decisive steps to change the culture in their workplaces.

This is difficult to do if boards cannot identify a return on investment.

There have been various reports that are often referred to as providing the business case for change. 

For example, the McGregor Smith review in 2017 estimated that "the potential benefit to the UK economy from full representation from BME individuals across the labour market, through improved participation and progression, is estimated to be £24 billion a year, representing 1.3% of GDP". 

The widely cited 2019 McKinsey report entitled "Diversity Wins" stated that companies that are gender diverse are 25% more likely to have above average profitability, organisations who are ethnically diverse can expect a variance of 36% profitability in comparison to competitors.

Other reports have reached similar conclusions (see "Further supporting evidence" below). 

However these reports provide data at a very high level across sectors and industries, which in some cases has opened them up to criticism that the findings are not replicable, leading to scepticism about the validity of the data. 

It has also been noted that these studies use blunt classifications based on gender and ethnicity, when in fact diversity comprises a myriad of different dimensions, such as socioeconomic, educational, regional, or experiential background, as well as the practices a company puts into place to foster inclusivity.

Much more granular research is therefore required to make the link between inclusive cultures and the economic performance of businesses.

While pressure is mounting for such research, in the meantime organisations are having to grapple with the challenge of trying to convince both insiders and outsiders of their commitment to creating inclusive cultures.

For example, employers are increasingly competing with each other to recruit the best talent. Some industries that have lagged improving their inclusivity, diversity and culture are starting to experience problems including skills shortages and ageing workforces, as younger workers look elsewhere for careers.

Even some esteemed professions that are vocal about I&D have found themselves locked in bidding wars for talent. Many have found that matching or exceeding competitors' salary offers is not enough to tempt candidates, as people choose where to work based on other factors, such as their perception of female and ethnic minority career progression, work-life balance and flexibility.

Competition to retain customers is also heating up. Procurement questionnaires asking suppliers to detail their diversity statistics and policies are now commonplace, particularly for public service contracts but increasingly for institutional buyers of goods and services.

Having a workforce that does not come close to mirroring societal diversity ratios is becoming increasingly uncomfortable, and in some cases flatly unacceptable, for businesses to confess and explain to prospective customers.

However are these pressures enough to persuade boards to take the need for inclusive cultures seriously? Probably not for all. 

What is needed is better classification and understanding of diversity and inclusivity and further research in particular sectors and industries, which can demonstrate an irrefutable link between high-performing companies and inclusive cultures. 

Unfortunately, in the absence of legislation to push wholesale compliance and level the playing field on inclusiveness and diversity standards, the moral case alone is not persuasive enough for many organisations.

Further supporting evidence: The benefits of diverse workplaces

• Deloitte's 2018 Millennial Survey found that a key decisive factor for candidates to apply for, and remain in, jobs was an employer's commitment to inclusiveness and diversity. 
• In August 2020, US computer giant Intel published an article called "For Businesses to Succeed in 2030, Gen Z Says No One Can be Left Behind", stating that inclusiveness and diversity was almost as important as salary to 'Generation Z'. By 2030, Generation Z will make up 1 billion members of the global workforce. 
• The UK's Investment Association (IA), which represents investors and manages approximately £8.5 trillion, is now issuing amber top warnings on FTSE's 350 companies who fail to disclose board ethnicity data or lack a credible plan to achieve targets identified by the Parker Review of ethnic diversity of UK boards, first published in 2017 and updated in 2020. 
• In July 2018 the Financial Reporting Council (FRC) updated its guidance on board effectiveness and imposed annual reporting obligations on premium and standard-listed UK companies to supply their inclusiveness and diversity statistics on a comply or explain basis.
• The FRC also published an updated version of the UK Corporate Governance Code in 2018, establishing that appointments and succession plans should promote diversity based on the protected characteristics of the Equality Act 2010 and detail their company's I&D policy, objectives, alignment with the organisational strategy, implementation and progress to achieving its objectives.
• In 2021, the UK's Financial Conduct Authority (FCA) conducted a consultation on whether to introduce comply or explain targets for listed company boards.
• By Q3 2022, the Bank of England (BoE), Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) will make a firm ruling on proposals based on their July 2021 joint discussion paper, asking for views on plans to improve diversity and inclusion in the financial services sector.

This article was written by Ranjit Dhindsa, Head of Employment, Pensions, Immigration and Compliance at Fieldfisher and Niamh Doherty, Inclusiveness and Diversity Assistant at Fieldfisher and was first published on Reward Strategy.