In case there was any doubt: it’s time to address the lack of ethnic diversity in boardrooms.

The issue has been in the background for some time, but the Black Lives Matter protests in the US, UK and around the world last year, following the horrifying death of George Floyd, emphatically brought the message home. But boardrooms should now be aware that investors are pushing for it too. It makes sense, both ethically and from a business point of view.

This week State Street, one of the world’s top five fund managers with $2.7trn under management, put UK companies on notice. Cyrus Taraporevala, president and chief executive, declared “racial and ethnic inequity is a systemic risk that threatens lives, companies, communities, and our economy—and is material to long-term sustainable returns”.

Let that sink in. “Material to long-term sustainable returns.” It’s a business issue because it is a societal issue. Business does not exist in a vacuum. Businesses have to represent the society in which they trade.

As a result, State Street has taken the bold decision of announcing that this year it will vote against the nominations and governance committees at FTSE 100 and S&P 500 companies that fail to disclose the racial and ethnic composition of their board.

In 2022 State Street is planning to up the ante. It will vote against the same boardroom chairs where they fail to appoint “at least” one director from an “underrepresented community to their boards”.

The fund manager also warns boards to be “prepared for thorough engagements”. Tough conversations may be on the way.

Setting ambitions and targets

State Street is not alone in being concerned about ethnic diversity in boardrooms. This week the World Economic Forum (WEF) published a paper with consultancy Baker McKenzie looking at the way boards need to equip themselves for an era of stakeholder capitalism. They identify a number of drivers including social change: “Notably racial and gender equity, social and intergenerational mobility.”

According to WEF executive chair Klaus Schwab: “Leaders are increasingly recognising that for a business to succeed over the long term, it must provide profitable solutions that positively affect all stakeholders. This fundamental approach to decision-making in the boardroom, through connecting value creation and stakeholder outcomes, is the heart of stakeholder capitalism.”

Others investors have been agitating on the topic of ethnic diversity. Last year Legal and General Investment Management said it would be their priority too. The investor said its expectation is that “companies set ambitions related to the ethnic composition of their organisation, throughout their workforces with a particular emphasis at the board level, which generally sets the tone from the top”.

Voting against board members on ethnic diversity flows naturally from the Parker Review, which set FTSE 100 companies a target of having at least one director from a minority background by 2021.

The UK’s governance watchdog has aired its concerns. In its own report the FRC declared “most UK companies’ approach to board ethnic diversity is unsatisfactory”. The FRC found that over half of FTSE 250 companies fail to mention ethnicity in their board diversity policy, with most of the FTSE 350 failing to set measurable ethnicity targets. Just 14% of FTSE 100 companies set similar measurable objectives for their boards.

When Board Agenda approached experts to talk about the trends they see emerging in 2021 there was agreement that ethnic diversity, and diversity more generally, would be a key issue.

Mikko Arevuo, a business strategy expert at Cranfield School of Management, says: “Diversity and inclusion has to expand from what it is at the moment. It underlines all the other issues.”

It looks like investors will do their best to make it so.