Legal

What the new FCA diversity requirements mean for firms

30 Sep 2021 By Emma Bartlett

Emma Bartlett explains the implications for employers as the financial watchdog consults over proposals to improve transparency on diversity of company boards

The changes over which the Financial Conduct Authority (FCA) is currently consulting are the following:

  • A voluntary target of 40 per cent of the board should be women (including those identifying as a woman);
  • At least one of the senior board positions (chair, CEO, senior independent director or CFO) should be a woman;
  • At least one member of the board should be from a non-white ethnic minority background.

Boards will be required to ‘comply or explain’ in their annual financial reporting how they are performing against these voluntary targets, alongside data on the composition of their board by gender and ethnicity as of a specified date. For the future, the FCA is consulting as to whether to extend this narrative to also include data on sexual orientation and whether this should extend to senior leaders just below the executive. 

Finally, the FCA is proposing to amend requirements for corporate governance statements to disclose the diversity policies which apply to the board and key committees of the board (specifically remuneration, audit and nominations committees) or to explain why no such policies apply. It will clarify that the aspects of diversity to which the policy may relate could include, for example, ethnicity, sexual orientation, disability and socio-economic background as well as those aspects already included in rule DTR 7.2.8AR

Will this put pressure on UK companies?

While the targets and measures are not mandatory, undoubtedly UK companies will be concerned about pressure from industry. The proposed changes mirror the hybrid approach to improving diversity on boards adopted by NASDAQ, which just received regulator approval that listed companies must have two diverse directors or explain why not. Companies in today’s world will be very reluctant to explain that they could not find qualified women or members of underrepresented communities.

The voluntary target of one third women on boards set by the Hampton Alexander Review (HAR) has demonstrated over the last 10 years that positive diversity changes at board level and in the senior leadership pipeline can be achieved, but it has taken considerable time. 

There has been a strong increase in women in executive committees and there are 20 per cent more women on boards of FTSE 350 companies in the last four years, but it is an ongoing challenge. Almost one-third of FTSE 100 companies have missed the 33 per cent target, with a few serious laggards. 

Key drivers for change were HAR’s ‘naming and shaming’ of male-only boards, boards adopting a ‘one and done’ approach, and those who complained that there were either no qualified women or they had already been snapped up. The position taken by investor groups using voting rights to effect changes has been most positive. 

How will this impact the industry?

Voluntary reporting is intended to allow companies the flexibility to provide context of their board diversity approach, increase transparency for investors of UK companies listing equity shares or certificates representing equity shares, and improve market integrity. As a result, in scope companies should be incentivised to improve diversity.

Changes may not be implemented immediately as turnover of directors will depend on length of tenure, but we can expect to see increased pressure on executive recruiters to deliver a diverse line-up of candidates as well as increased opportunity for diversity in senior leadership positions. 

To retain investor confidence, given current prioritisation to ESG, the accompanying narrative explaining non-compliance will be key and should explain how the business is implementing strategies to organically improve their statistics. 

Such cutting-edge changes will lead the way for specific diversity requirements in other industries, as well as further changes in financial services in the near future. 

Emma Bartlett is a partner at CM Murray LLP

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