New rules for listed companies on diversity reporting and board targets: new, or just more of the same?
Recently, the FCA announced new rules for listed companies in the UK to report on the diversity of boards and executive management, with new board targets on a comply or explain basis. Whilst these are a step forward in mandating diversity reporting for listed companies, do they really go far enough to drive change or take us beyond where we were already heading?
What do the new rules say?
The new rules are two-fold:
- For the board: there are new targets for listed companies to meet on a ‘comply or explain’ basis, requiring:
a. At least 40% of the board are women.
b. At least one senior board position is a woman.
c. At least one board member is from a minority ethnic background.
- For the board and executive management: listed companies must now disclose in their annual reports numerical tables which set out: (i) the sex or gender identity; and (ii) ethnicity, of board, senior board positions, and executive management.
In addition to the rules above, listed companies must also explain their approach to collating diversity data to meet these disclosure requirements, including the method, source, whether this has been collated by self-reporting, and if it has, a description of the questions asked. Existing rule DTR 7.2.8AR has also been amended so that a company’s disclosure on its board diversity policy should include the diversity policies which apply to its board committees, namely the remuneration committee, audit committee and nomination committee, and have regard to “wider diversity aspects”, such as ethnicity, sexual orientation, disability and socio-economic background.
On top of these new rules, there are some ‘nice to haves’. The FCA makes clear that companies “may” wish to:
- Include numerical data on the diversity of its members of its committees.
- Include a brief summary in their reports of key policies, procedures and processes and any other wider context the company considers contributes to improving the diversity of its board and executive management.
- Include a brief summary of any mitigating factors or circumstances which make achieving diversity on boards more challenging, or any risks it foresees in being able to meet the board diversity targets.
The practical points
We should expect to see first disclosures meeting these new rules in financial reports published from around Q2 2023 onwards.
At this stage, it is important to remember that these are new rules for eligible UK listed companies by the FCA in its capacity as a governing body for UK listed companies. Separately, the FCA is engaged in a campaign focused on D&I for the financial services sector (irrespective of size and listing) alongside the PRA and the Bank of England. Whilst that exercise is parallel to these new rules and is mentioned in the FCA’s policy statement, the two campaigns are not to be confused. There is more to come on the focus on D&I across financial services and new rules and regulations might be on the way (you can find out more about this here).
The power of the narrative
Given the ‘nice to have’ suggestions, we expect to see varying degrees of reporting and narratives, with inconsistencies in terms of style, content and granularity.
The power clearly lies in the narrative here. Eligible companies should not fear non-compliance of board targets, providing they are prepared to explain, explain, explain! The FRC has noted for the past few years in its feedback for companies required to report on a comply or explain basis in accordance with UK Corporate Governance Code principles that companies are far too focused on compliance – which make progress on culture, equality, diversity, and inclusion a box-ticking exercise rather than focusing on how these issues are truly linked to a company’s purpose and values and reporting is done carefully and meaningfully.
Other “diversity aspects”?
What does this mean? Will this lead to inconsistencies in reporting narratives and approaches?
Socio-economic background has also been listed as a diversity aspect that companies should have regard to in their reporting of diversity polices applicable to its board committees. Socio-economic background or social mobility is not a protected characteristic under the Equality Act, and there are many ways in which an individual’s social mobility can be assessed, measured, reported on and characterised – often in a subjective way.
Sex or gender identity?
For the numerical disclosures of female representation across boards and executive management, companies can choose how to report on the basis of sex, or gender identity. The FCA has left it to companies to decide how best to approach this. Could this lead to inconsistencies in reporting? Are there risks for companies in how they approach it and could they end up discriminating against, marginalising or alienating some employees?
The focus on the top
These new rules focus attention at the top of listed companies. It does not focus attention of D&I throughout the organisation or require leadership to be truly reflective of the demographics of their workforces, communities, or customer base. In contrast, the recent Discussion Paper by the UK financial services sector regulators looks at prioritising D&I at the centre of a business, not just at the top.
What do these rules say that FTSE Women Leaders and the Parker Review didn’t already?
The new focus by the FCA for listed companies seems to be on the diversity of senior positions and executive management – much like the new FTSE Women Leaders Review. Although the new targets only apply to the board (unlike FTSE Women Leaders Review which expands the targets to executive management and the UK’s 50 large private organisations).
Earlier this year, it was reported how almost all FTSE100 companies (94%) had achieved the target in the Parker Review of having one person of colour on their board. But most of these companies are still failing to bring diversity through to executive levels, and most appointed persons of colour were NEDs – so is this the same portfolio of NEDs with numerous appointments, or reflective of a genuine improvement in board diversity across UK listed companies?
What to expect in the future?
The new rules will be reviewed by the FCA in three years’ time. Clearly, the focus will be on the executive management level at that point, but we question whether much progress will have been made in three years given the tenure and pipelines for these roles being slower to change than at board level.
Our closing remarks...
Overall, the new rules are not ground-breaking and are reflective of what most listed companies should be or are already practicing from a good governance perspective. But the new rules do formalise the reporting requirements for listed companies and add a governance layer to diversity reporting.