Small UK firms cannot afford to ignore diversity

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Large UK companies have made decent progress in improving gender diversity on their boards. Their smaller peers are letting the side down.

To be sure, board make-up is rarely a high priority in the early days of building businesses. But UK growth companies will have to get their act together if they want to attract more institutional money.

Chancellor Jeremy Hunt would like pensions funds to invest more money in UK growth companies — or “unlisted equities” which (perversely) includes businesses listed on London’s junior Aim market and the Acquis stock exchange.

Quite how much money flows from the so-called Mansion House compact, signed by nine of the UK’s largest pension providers, remains to be seen. But those scouting for opportunities may bring with them higher expectations.

Smaller companies are subject to less stringent corporate governance rules than larger peers on London’s main market, for good reason. They are also under less scrutiny on issues such as diversity.

The FTSE Women Leaders Review, for instance, tracks female representation on the boards of the FTSE 350 and 50 of the UK’s largest private companies. The initiative has already achieved its target of ensuring that over 40 per cent of board positions on FTSE 350 boards are filled by women by the end of 2025.

But just under 16 per cent of positions on the boards of Aim-listed companies are held by women, according to advisory groups indigo independent governance and Addidat, even if that is an improvement on 13.7 per cent the previous year.

Gender diversity is only one way of ensuring boards don’t fall prey to the dangers of groupthink. Boards should look at other factors such as ethnicity and socio-economic background. Nevertheless, gender is one marker of whether a board is committed to a strong mix of skills, knowledge and experience, argues Bernadette Young, co-founder and director of Indigo.

This may be a test of whether institutional money can take a pragmatic approach on such governance matters. The boards of young, founder-led companies can have low turnover when they are in growth mode.

Standards are already shifting. The Quoted Companies Alliance last year updated its corporate governance code for growing companies, which recommended boards should “understand and challenge” their own diversity, including gender balance.

Other concerns put institutional investors off UK small caps, including liquidity and a paucity of good research. Making the grade on basic governance norms — or even on targets to improve — is at least within boards’ power to change.

nathalie.thomas@ft.com