Has the recent increase in diversity on pension trustee boards had a positive impact upon the quality of their decision making? Although the impact is very hard to measure, it is fair to assume it has had mixed results.
By drawing parallels with academic studies, there are valuable lessons to learn on how to achieve the full potential of a diverse decision-making body. The key conclusion is that
increased diversity needs to be paired with high quality leadership in order to achieve the very best results.
There has been much focus on changing the mix of trustees on pension boards. The Pensions Regulator (TPR) has been encouraging diversity since its 21st Century Trusteeship”campaign began in 2016. An action plan followed in 2022 alongside the establishment of an industry working group. TPR’s thinking is that more diversity brings different perspectives and ideas to the table, enabling better decision making.
Multiple surveys have shown that the composition of trustee boards is now changing. This evolution has been supported by the growing market coverage of professional trustee companies, who themselves have been increasing the diversity within their organisations. In March 2024, TPR shared the results of its first trustee diversity and inclusion survey. This showed the trustee community is still dominated by white males aged over 45.
Whilst it is vital that trustee boards become more representative of wider society, that alone will not guarantee better decision making. There is another crucial component to ensuring that increased diversity has a positive impact. Without this additional factor, outcomes may be unaffected by diversity, or in some cases may even worsen.
Professor Lee Fleming of Harvard Business School conducted a study in 2007, into how groups can achieve breakthroughs in creativity (“Breakthroughs and the Long Tail of Innovation,” Sloan Management Review). He found that increased team diversity results in a wider range of outcomes. In some instances, diverse teams underperform homogeneous teams due to increased conflicts and other factors.
By contrast, homogenous groups may not achieve the very best outcomes, because they are missing the different perspectives a more diverse group brings to the table. Fleming found that the differentiator between positive and negative outcomes for diverse groups was the quality of leadership. Diversity plus leadership resulted in the very best outcomes. In comparison, the benefits of diversity can be lost without this and, in worst case scenarios, increasing diversity can result in declining outcomes.
Applying this in a pensions context, efforts to increase diversity on trustee boards must be combined with support for trustee chairs to operate to the highest standards of leadership. This will require an evolution of the current regulatory approach to diversity.Continued efforts should be made to attract a wider mix of individuals to boards. But it is crucial that this quantitative aspect progresses hand in hand with an increased focus on the quality of leadership offered by trustee chairs. Equipping chairs to fully embrace the opportunities presented by more diversity on trustee boards should become a centrepiece of the regulatory strategy, supported by industry groups sharing ‘best practice’.
Thankfully this evolution has already begun. TPR’s Equality, Diversity and Inclusion Guidance from March 2023 highlighted that the role of a chair includes fostering an open and inclusive culture. The March 2024 General Code lists expectations of trustee chairs including: recognising the potential of fellow trustees, managing conflicts, achieving compromise and consensus, encouraging participation, and gathering and understanding diverse views.
However, guidance to date may be understating the importance of the role of the chair. Diverse trustee boards need to be closely managed both in trustee meetings and between meetings. This requires an ongoing process of nurturing the group so that their performance is optimised when they come together in meetings. This presents a particular challenge in the pensions context where most boards only
meet once per quarter and the chair is normally subject to time and cost constraints. However, it is not an insurmountable challenge and there
are already some great examples of how this can be done.
