How to ACT Guidance Pillar 2 : Challenge

01. Pillar 2: Accountability and reporting

02. Challenge

03. Question set

04. What we expect to see

05. How to get there and why

06. Further resources and ideas

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01. Pillar 2: Accountability and reporting

This pillar enables firms to set out the approach they are taking towards improving processes, implementing changes and identifying targets. It should be clear to stakeholders where oversight and accountability for delivering on values lies. It is expected that this will be a member of senior management, for example at the c-level or equivalent, senior level with Board sponsor. This ensures the firm can implement any strategies, allocate resources appropriately and is able to measure progress.

02. Challenge

The collection of appropriate data and how this challenges any targets that have been set.

The creation of measures that will enable progress towards targets. The collection of feedback and engagement with staff on rate and integrity of progress.

03. Question set

How is the Firm’s DEI strategy linked to organisational targets (including planned measures or improvements)?
Describe any KPIs for the Firm’s Board Members, Management and other employees that are explicitly linked to diversity contribution or performance, and if these are linked to remuneration.
Does the Firm include responsibilities linked to DEI targets, objectives, and goals as part of job descriptions for all its employees?
Describe how resources are committed to DEI objectives, including how this is monitored and reviewed to achieve DEI outcomes.
Describe how the Firm includes responsibilities linked to DEI targets, objectives or goals as part of job descriptions.
Are responsibilities linked to DEI targets, objectives and goals in job descriptions covered for all employee roles, on an ad-hoc basis or part of compliance (e.g. SMCR)?
Does the Firm intend to include responsibilities linked to DEI targets, objectives, and goals as part of job descriptions for all its employees?
a. Explain what the Firm intends to include regarding responsibilities linked to DEI targets, objectives, and goals as part of job descriptions for its employees.
b. Explain why the Firm does not intend to include responsibilities linked to DEI targets, objectives, and goals as part of job descriptions for its employees.
Describe how the Firm uses the information on diversity characteristics collected from employees to inform and improve diversity and culture.

Overall, the targets and related objectives being presented should include:

Measures that relate to business performance, which can be through a lens of finance and investment capital, but also human capital.
Measures that demonstrate improvements to representation.
Measures that demonstrate inclusion and belonging.

04. What we expect to see

Ideally, organisations will be able to draw a line between the overall strategy, goals and targets that have been developed in relation to diversity, inclusion and culture with the wider organisational targets. The DEI strategy should be part of or referenced by the business strategy, and is separate to any policy relating to DEI, which will be a more operational and implementing document. As knowledge on DEI has matured, so now must the firm’s approach to be more strategic and unifying, to avoid competition between topics that dilute the overall effectiveness of DEI and culture measures.

Key performance indicators (KPIs) for board or senior management staff that relate to culture, diversity and inclusion help to focus on resourcing and delivery, especially if there is a tie to remuneration. Long-term goals (including progress towards representational targets) can be presented as the forward looking or leading indicators to accompany the backward-looking indicators such as existing data. As the latter data indicators on diversity are likely to require time to see improvement, milestones within the targets are important to signal the intended pathway and enable monitoring of progress. They also help give context to what the firm thinks it is able to execute and therefore what it is reasonable to expect in terms of outcomes.

The creation of targets should aim to support a more systematic approach across the firm. Many firms will already have one target (for example as part of Women in Finance commitments). This can be used as a model approach to other diversity areas. Targets may mean that the allocation of unequal resources due to a need for immediate or more substantial action. Allocating resources effectively to programmes, initiatives, training and people that can help achieve progress towards targets should ultimately be what the accountable executive enables the business to strive for.

“Recruitment starts well before a candidate is shortlisted - the first element is the firm’s public image.”

Firms can think beyond quantitative elements too, as qualitative elements can help to shape behaviour that will drive changes in data. Examples include ways to reward collaborative and cooperative behaviours that have a collective benefit for the firm, such as supporting another team with a delivery, creating shared resources or platforms to share, undertaking non-performance related team administrative tasks or contributing towards culture via ERGs or other forums that are outside of the main job description. It should be possible to develop reward systems that consider team behaviour and that which contributes to the intended real-world outcomes identified by the firm – including SDGs.

Firms should aim to demonstrate how expectations for DEI have been included into their investment process, and any priorities and targets, such as investment in particular communities, sectors, types of business or ownership structures. Firms should consider reviewing what measures (if any) are in place that would enable diversity of staff that are in revenue-generating roles.

05. How to get there

A good governance process includes setting objectives (where it wants to get to) and targets (how it will measure its progress) that apply to all levels of the business and are drawn from the company’s purpose, vision and values.

As with any strategic goal, KPIs for board and senior management should be related to support of the business goal. For example, if the company-level goal is related to the delivery of investment processes that support sustainable outcomes, the KPIs can support in various ways; ensuring resources are allocated to the development and support of teams with the right expertise and diversity to deliver on that goal; by supporting changing internal and established processes that do not guarantee this outcome; by establishing processes that help with monitoring and review.

Opinion remains divided on whether to link KPIs to remuneration. Simply put, it is a more effective lever because it communicates that the KPI is considered on the same level and merit as other strategic business considerations. The business case for diverse teams has been made across several pieces of research. Incorporating targets or factors in remuneration that drive improved performance, therefore, helps to deliver shareholder value. Management programmes that incorporate culture, diversity and inclusion are also therefore appropriate for the business.

For compensation to be effectively linked, senior management needs to maintain understanding of diversity and inclusion topics and practices that are most relevant to the business, to ensure that KPIs are both appropriate and can be sufficiently stretching.

As with all KPIs, fewer, more targeted ones are more impactful. The KPIs could:

Relate to achieving internal and operational diversity objectives, including those related to employee welfare.
Encompass the implementation of measures that support the creation and maintenance of more diverse investment processes and/or teams.
Focus on impacts and outcomes related to company commitments to third-party initiatives that target real-world outcomes, such as SDGs.
Focus on the ability to communicate with stakeholders, including clients that are signalling relevant interests and expectations.

The KPIs should include alignment with any relevant initiatives and should include an appropriate timeframe, which may differ across KPIs.

Accountability and oversight over the organisational KPIs should be assigned to the highest appropriate level of governance structure for the size of the firm. The Accountable Executive can help to ensure the requirements for reporting and data collection are communicated to all staff, which could be via intranet or within employee policies. It can also cascade down to managers as part of their responsibilities.

Firms should be clear on who is responsible for delivery of each area, and place the responsibility within formal objectives for the individual. The discussion and agreement on individual objectives is a key part of the managerial relationship that helps the employee to become focused and invested in their success, and will vary according to the role. However, prior to creating the specific individual objectives, each manager should be setting expectations that all staff adhere to the behavioural and investment aspects of relevant policies. Adherence to policies and processes should be a basic part of any job description and be supported by ongoing training and development. All staff should maintain a reasonable standard of knowledge on the firm’s culture and values, as well as on its approach to diversity. They should also be required to confirm this on an annual basis as they would with other policies.

With the expectation on staff clear, firms should then consider how they will incorporate what they know and are learning from employees to feed back into the business. Diverse and inclusive investment teams will be driven by a structure that enables representative, cognitive and experiential variety of participants and can be supported by ensuring every team member understands expectations and has received training that is appropriate to their role and experience.