The negative effects of groupthink on the Irish financial services sector is back in the spotlight, with public attention again focussed on governance and culture in financial institutions and a question mark over what has changed since the financial crisis. However, for the Central Bank of Ireland (CBI), focus on the interplay between lack of diversity and increase in risk has never gone away. In fact, diversity and inclusion in regulated firms has been an increased focus of the regulator for the last number of years. As the CBI has said in its most recent Dear CEO letter, it is "placing a spotlight on this issue, and intend to keep it there" - read more here.
For the regulator, there is a direct correlation between a lack of diversity at senior and executive level and increased risk of poor decision making and bad risk management, the rationale being that increased diversity protects against overconfidence and encourages internal challenge.
In 2018, the CBI published a report on the Behaviour and Culture of the Irish Retail Banking Sector, which found that more work was required in ensuring the industry was sufficiently diverse and inclusive. Following on from the retail banking review, in July 2020, the CBI published a thematic assessment of Diversity & Inclusion in insurance firms. In that report the CBI concluded that there was a lack of sufficient progress by insurance companies on improving diversity and inclusion, which gave rise to regulatory risks - read more on that here.
In the Compliance Files podcast, Seána Cunningham, Director of Enforcement and Anti-Money Laundering at the CBI here has said that senior leaders have to provide clarity of direction on their vision for D&I and how it is aligned to the strategic direction of the business, with at least a detailed annual discussion by the Board and regular discussions at an executive level.
For the last five years, the CBI has also provided updates on the levels of diversity of senior appointments at regulated firms. The Demographic Analysis report for 2020 (the 2020 Report), published in March 2021, examined 3,600 applications to the CBI for approval to occupy pre-approved control function (PCF) roles in senior management and, or board level roles within certain regulated firms. The 2020 Report focuses primarily on gender diversity and also touches on age and nationality profiles of applicants. That diversity extends beyond gender, age and nationality is expressly acknowledged by the CBI .
Just over one in four applications for regulated firms were for women. While this is an increase from about one in six of the applications received for such roles in 2012 (the first year such an analysis was carried out), it is an increase from a low base with “little overall change” in 2020 relative to 2019.
Female applications for board level positions fell to 22 per cent in 2020, down from 24 per cent in 2019, with the 2020 Report highlighting a “pronounced gender imbalance” at board level across all sectors. 84% of role holders in business revenue and strategy roles were also male.
Interestingly, existing regulated firms show higher levels of gender diversity than new firms seeking authorisation with a ratio of four to one in terms of male vs female applicants for new firm authorisations - what the CBI has deemed a “material imbalance”. Men also hold 85% of current PCF positions in the asset management sector, 78% in banking sector and 74% in the insurance sector.
The 2020 report also looked at nationality and age diversity, with the majority of applicants for PCF roles being Irish (64%), with UK nationals being the second largest cohort of applicants (16%). Over two thirds of applicants were in the age bracket 35-54 years of age. At board level, almost three quarters of applicants were above the age of 45, with males in the 45-54 age range representing over one third of executive directorship and chief executive applications.
The 2020 Report directly references the fact that diversity and corporate culture are environmental, social and governance (ESG) factors. Public consciousness of ESG has rapidly increased, no doubt expediated by the COVID-19 pandemic, the Black Lives Matter and Me Too movements, with ESG issues quickly rising up the agenda not just for regulators but for governments, investors and individuals. This means that diversity across the spectrum is not a challenge unique to the financial services sector but is an increasingly important consideration for leadership across sectors who are conscious of the fact that ESG is the new means through which companies will be evaluated and measured. Edelman’s most recent Investor Trust research shows that investors believe that companies that excel in ESG merit a premium valuation of their share price, with “social” now ranking as the most important element for investors. It also showed that diversity and inclusion screening is now used by 7 out of 10 investors, including for board diversity.
An opportunity exists for companies to not only ensure compliance with their CBI obligations but also to develop ESG initiatives that can set them apart. With developments expected in 2021 on the proposed Senior Executive Accountability Regime, this area is likely to remain towards the top of the CBI’s agenda for the foreseeable future - in fact the CBI has a specialist team conducting D&I assessments across sectors.