Arts organisations could have their funding cut if they fail to improve diversity under newly-unveiled plans.
The Art Council's announcement is described as a "fundamental shift" in the organisation's approach.
Each body it funds will have to demonstrate how they have promoted diversity within their leadership, workforce, programming and audiences.
"Our work should reflect and engage with all our talent and communities," said chairman Sir Peter Bazalgette.
The implementation of the new plans is due to start in April 2015.
Sir Peter revealed the plans in a speech at Sadlers Wells, which he described as one of the most important he has made in his role.
"Britain has got many, many talents. And our work should reflect and engage with all our talent and communities. That's how we will ensure work of true ambition and enduring quality," he said.
He admitted that in the past the the Arts Council had tried to promote diversity "without grasping how complex it is" and said they "can and must do better".
Sir Peter pointed out that some national organisations and museums were making good progress but they had been "shouldering this responsibility alone for too long".
All groups that they fund will be asked to shape their artistic programme to better reflect the communities they serve and they will be held to "account" on their progress when it comes to their next round of funding in 2018.
Sir Peter did not go into further details of how that would be imposed.
He told The Guardian he saw this as encouragement rather than a threat.
"I call it a carrot because it is a is a way of making it work better - I don't call it a stick."
He also announced their Creative People and Places programme will fund a further £25 million to areas with low engagement in the arts, while their strategic touring fund will target the needs of specific audiences.
In his speech, Bazalgette said he hoped the plan would produce major changes.
"For things to change, long-term, they need to become more uncomfortable at the top. We have to open up access to power and to resources.
"Looking up, too many see the white cliff-face of the arts establishment and feel they just cannot climb it.
"We can't give people creative talent. But we can and must give those with talent creative opportunities. The arts are a mirror for society; and if we sort this, the arts won't have to make the case for diversity. The arts will simply be the case."
The plans were welcomed by entertainment union Bectu.
Janice Turner, Bectu's diversity officer, said: "Welcome is Peter Bazalgette's acknowledgement that the focus, until now, has been almost entirely on black, Asian and minority ethnic-led companies, which let the rest of the industry off the hook."
Actress Meera Syal, meanwhile, is the latest star to call for more diversity in theatre.
She told The Stage that theatres should cater more for Asian audiences and take advantage of the 'brown pound'.
"There's a very gregarious, moneyed, new generation [of Asian audiences] coming up, who spend an awful lot of money on entertainment and culture. And I think the theatres are missing a trick if they're not putting on stuff that might appeal to those audiences," she said.
Syal is currently starring in Behind the Beautiful Forevers at the National Theatre.
She said Asian audiences are "extra supportive and extra excited when they see stories that reflect their experiences or a diverse cast of people that they might know."