Diversity at the top makes banks better

Blog post by By Frank Elderson and Elizabeth McCaul

Frankfurt am Main, 9 May 2023

Banking is still a man’s world. Out of the 361 CEO appointments made between 2020 and 2022 at the significant institutions (SIs) directly supervised by the ECB, as well as at their subsidiaries, more than 300 were men, as the ECB has observed. Also, in the same period, only 36% of members of boards newly appointed in SIs were women. Why is that an issue? For one thing, diverse boards make better business decisions. And as supervisors it is our job to check that banks take steps to create the best conditions for making good decisions.

So, we have been gathering information about governance in SIs. Unfortunately, the data reveal a mixed picture. On the one hand, there have been improvements in banks’ diversity policies, which include education, experience, geographical provenance and age in addition to gender. Last year, we addressed a number of banks directly about their lack of such policies, and it’s good to see that they have acted on this. Other banks that did already have diversity policies in place have raised their targets. On the other hand, when we look at the actual targets set, we can only express our disappointment. On average, banks only raised their diversity targets for management bodies from 32% in 2020 to 34% at the end of 2022.

In addition to the actual targets being disappointing, what can we say about how banks are meeting them? Overall, around one third of SIs have not met their own targets and are planning to do so within the next 3 years. While 28 of the banks that we directly supervise increased the number of women on their boards in 2022, 16 made appointments that actually reduced gender diversity. Moreover, the share of female board members appointed was low, at around 34%. With these numbers we doubt that these targets could be reached anytime soon.^[1]

This is just not good enough. For the sake of sound governance banks have to push for faster improvement. That is why we added gender diversity considerations to our Guide to fit and proper assessments in 2021. The Guide lays out the checks we conduct to ensure that newly hired top managers are ready and qualified to run a bank and it now asks banks to respect their gender diversity targets. We also made management body effectiveness and diversity part of our 2022-24 supervisory priorities in an effort to boost the speed at which improvements are being made.^[2] This commitment has now been reaffirmed in our 2023-25 priorities, in particular in terms of making banks better able to deal with the growing challenges they face.^[3] When we identify shortcomings in diversity policies during the fit and proper process, we send recommendation letters to banks about how they can address any shortcomings identified and meet the targets set. In 2021 and 2022, we raised diversity issues in 36 cases, most of which we addressed by making recommendations. In addition, we monitor how banks perform in terms of gender diversity during the Supervisory Review and Evaluation Process – in which we check banks’ ability to deal with potential risks. Overall, we continue to see diversity as a priority when it comes to internal governance.

Let’s look at a recent example of how we used our supervisory tools to address banks’ shortcomings. In one case, we identified a bank whose board was not functioning well, partly due to a lack of diversity of thought and experiences. This finding resulted in an on-site inspection of the bank. In addition, we suggested that the bank conduct an external review of its board to compare it to industry best practice. The review confirmed that there were weaknesses at board level, in particular with the members collectively not having the relevant experiences needed and a lack of independence, thus limiting the ability of the board to oversee the bank’s activities. We then required the bank to review the composition of its board. In the end, the bank changed the composition of its board to increase the diversity of its members’ experiences and backgrounds. We will continue to assess cases like these as part of our ongoing supervision and the fit and proper process in relation to future board appointments.

We want to see gender-balanced boards, not only because it is fair but because it improves governance. One reason is that gender-balanced management encourages a broader range of views, opinions, experiences, perceptions, values and backgrounds. This is crucial for avoiding groupthink or herd mentalities, and may also be beneficial for the soundness of the bank.

“Women on Boards”

Striving for gender balance is not only a priority for the ECB. Change is also coming at the European level. At the end of 2022, the co-legislators formally adopted the Women on Boards Directive.^[4] This set a clear target: the corporate board of a publicly listed bank can only be considered balanced when each gender makes up at least 40% of its composition.^[5] While some countries have already set a target and others have not, all EU Member States are expected to incorporate this EU directive into national law within the next two years. Around 35 SIs will then have to meet the target by June 2026 at the latest. Once the target has been incorporated into national law, we hope that benchmarking and peer pressure will become even more powerful tools that will help to improve banks’ governance.

We will use the supervisory tools already available within the bounds of national legislation to insist that banks improve and address any internal governance shortcomings relating to gender diversity. We will also work relentlessly to ensure that banks set more credible and ambitious diversity targets for themselves, and that they then achieve them. Improving diversity is in banks’ best interests because it can help to improve decision-making. More importantly, doing so is also in the best interests of the general public because it guarantees strong bank governance through sound, more informed decision-making. And that means safer banks for everyone in Europe.

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