Why do some leaders accept poor workforce diversity outcomes?

Workforce Diversity

Accountability matters. Executive leaders that consistently underperform are usually replaced. I guess you are wondering what that has to do with workforce diversity.

Performance management shapes leadership. It often focuses leaders on a mix of short and long term measures, and uses bonuses to encourage achievement. In large organisations, targets primarily involve budget compliance, and achieving revenue and profitability goals. This is how a board usually aligns leadership with board level strategy.

In this context, in April 2015, the Australian Institute of Company Directors (AICD), set a simple voluntary target for Australian publicly listed companies. They suggested that 30% of board directors for ASX200 companies should be women by 2018. In 2015 when the KPI was set, the actual baseline was 20%, so it was a very modest KPI, one which could conceivably have been achieved simply through business as usual.

It was an interesting choice of KPI. It is easily calculated by any external party who reads the public facts found in corporate reports. In essence, it cannot be hidden or obfuscated easily, and it had already by that stage become a lightning rod for shareholder discontent and activists. Usefully, it is also a metric which directly reflects upon board governance and responsibilities. The implication being that organisations that fall below the AICD target are poorly led, are underperforming at an executive level, and have poor governance.

So, even with a soft target, and the potential shame of visible underperformance, it took an extra year for the KPI to be achieved. In December 2019, the AICD proudly announced that the KPI had now been reached, and women directors make up 30% of publicly listed directors for companies on the ASX200. When you consider all ASX listed companies, 24% of directors are women.

Perhaps it shouldn’t surprise, but the companies with the highest public profiles and market capitalisations have performed better, with 35%. These are companies that are often in the public eye, typically have large consumer client bases, and have the most to lose from shareholder activists mounting a negative campaign.

While the 2019 figures for gender diversity at a board level at publicly listed companies are certainly an improvement from 5 years ago, they still clearly indicate weak performance.

The Australian Federal Government reported in their Gender Balance on Australian Government Boards 2018-19 report that there were 341 Australian Government Boards, with 48% of board positions filled by women, an increase from 39% in 2014. Chair and Deputy Chair positions were reported as being 35% filled by women.

So it begs the question of why? Why do some organisations consistently tolerate serious underperformance when it comes to board composition and workforce diversity?

Culture change can take a long time to become firmly embedded, and this is perhaps where the AICD’s soft approach has seen some success in board rooms. It is now considered routine for publicly listed companies to provide substantial explanations of their workforce composition and diversity and inclusion strategies, which is leading to stronger accountability.

As an example, two large organisations which have actually invested very significant long term effort and resources into addressing imbalances in workforce diversity are the NSW Government and BHP. Both organisations have strategically chosen to build credible diversity and inclusion initiatives, which have now been in place for a number of years. Unfortunately, the resulting outcomes measured by diversity KPIs are still modest, and change is being delivered over very long time frames.

The mining sector has long been an industry that was skewed towards a male workforce. But BHP’s 2019 annual report paints an interesting picture of change within their large organisation.

201920182017
Female Board Members36%30%30%
Female Senior Managers24%23%24%
Female Employees24%22%19%
Source: Calculated from BHP annual report 2019

Now these overall figures indicate a dramatic shift for BHP over a 10 year period, and are clearly the result of a long term effort to achieve a rebalancing of their workforce. But it isn’t as strong a picture as it might seem.

BHP, like many large organisations, does not count a huge portion of their workforce as employees, because they are contractors. Contractors outnumber employees, making up 60% of the BHP workforce, according to their 2019 annual report. As you would expect, BHP does not take responsibility for their contractors’ workforce, saying that they “encourage and work with supply chain partners to support our commitment to inclusion and diversity”.

In theory, any publicly listed company could use outsourcing to achieve a given workforce metric or diversity target. It is clearly going to be a lot easier to quickly hit a public target if you can simply reduce your workforce and use more contractors.

So, gaming the KPIs is clearly possible, and relatively easy. But that doesn’t mean that there isn’t an opportunity to still improve diversity in the contracting workforce. Given the long-term nature of mining projects, and the asymmetry that can often exist when large organisations procure from suppliers and engage workforce contractors, it is certainly plausible to believe that BHP could rapidly drive change through their supply chain. Risk management concerns might also cause BHP’s leadership to consider rebalancing to more direct employment, which could also accelerate change.

Overall organisation level measurements are important, but so are the same KPIs when measured at a regional, divisional, and team level. Similarly, gender is one diversity lens, but it is certainly not the only lens that organisations should be considering.

BHP now reports significant information about their efforts to improve indigenous employment within their Australian workforce, and information about their efforts at LGBT inclusion. BHP report that 5% of their workforce in the Minerals Australia division is indigenous, with a target to achieve 5.75% by end of FY2020.

Public sector leaders are used to dealing with transparency relating to their workforce measurements. But that doesn’t make dealing with diversity challenges any easier.

Temporary NSW Government Rainbow Waratah logo, rolled out in 2020 as part of their LGBTI inclusion program to show support for LGBTI people and Sydney’s Mardi Gras festival

The NSW Government publishes their annual State of the Public Sector report of their workforce, which is one of Australia’s largest, with approximately 338,000 FTE, with a total of 408,000 when casual and temporary employees are included.

In the 2019 report, overall, 65.4% of the NSW Government workforce are female, 3.5% Aboriginal, 2.5% people with disability, and 4.1% LGBTI. The largest FTE employment clusters are Health (121,000) and Education (106,000), industry sectors which have workforces that have traditionally been skewed towards female participation.

Even with a largely female workforce, NSW Government still has a lack of women in senior leadership positions. Across all senior leadership positions, 40.3% are women in 2019, with a target of 50% by 2025. But a more detailed look at the results shows that while women leaders are well represented in entry level leadership positions, the situation dramatically reverses for more senior roles.

Excerpt from State of the NSW Public Sector 2019 report

Workforce diversity and inclusion can directly impact team level performance, problem solving, innovation. There is ample research evidence showing that organisations with diverse leadership teams produce stronger decisions, and outperform.

From a performance management perspective, it seems clear that diversity KPIs should now be part of the toolkit used to ensure that leadership at all levels of an organisation are in alignment with board level strategic goals.

Any leader who delivered consistently poor performance for financial KPIs would not expect to keep their job for long. The writing is on the wall. Leaders who fail to consistently deliver outcomes relating to workforce and team diversity are likely to face a lot more scrutiny, and pressure to lift their game.