With the aim of increasing transparency for investors on the diversity of listed company boards and executive management, the Financial Conduct Authority (FCA) has this week published its long-awaited policy statement on this topic (the Policy Statement). This follows a July 2021 consultation paper in which the FCA proposed to amend the Listing Rules (LRs) and the Disclosure Guidance and Transparency Rules (DTRs) to require in-scope companies to publicly disclose whether they meet specific diversity targets relating to gender and ethnicity, to publish standardised data on the composition of their board and senior level of executive management by gender and ethnic background, to indicate how diversity policies apply to board committees, and to clarify the aspects of diversity to which such diversity policies relate.
It is important to note that the Policy Statement is separate to the discussion paper published last July on diversity and inclusion in the financial sector (see our earlier blog post for more details). We understand that the FCA expects to publish a consultation paper specifically on the financial sector at some point this year.
The rules set out in the Policy Statement will apply to UK and overseas issuers with equity shares admitted to the premium or standard segment of the FCA’s Official List, excluding open-ended investment companies and shell companies but including closed-ended investment funds and sovereign controlled companies. They will apply for financial accounting periods starting from 1 April 2022, meaning that the new disclosures will start to appear in annual reports published from around Q2 2023 onwards. However, the FCA encourages companies whose financial years began before 1 April 2022 to consider reporting on the targets and making numerical disclosures in relation to their current accounting periods on a voluntary basis. This blog post summaries the key changes set out in the Policy Statement.
Statement in annual report
The FCA is introducing new Listing Rules (LR 9.8.6R(9) and LR 14.3.33R(1)) to require, as an ongoing listing obligation, in-scope companies to include a statement in their annual financial report setting out whether they have met specific board diversity targets on a ‘comply or explain’ basis. This stops short of setting mandatory quotas and essentially means that, if companies cannot meet the targets, they must explain why not.
Aligned with the recommendations set out in the recent FTSE Women Leaders Review (see our earlier blog post for more details), the targets set out in the Policy Statement are:
- at least 40% of the board are women;
- at least one of the senior board positions (Chair, CEO, SID or CFO) is a woman; and
- at least one member of the board is from a minority ethnic background.
Interestingly, the FCA received 439 responses to its initial consultation, mainly from individuals and interest groups, focused specifically and solely on the proposed targets on gender and ethnic diversity representation and the issue of whether those self-identifying as women should (as the FCA proposed) be included within the dataset. The vast majority of those responses opposed the FCA’s proposed approach on the basis that they disagreed with explicitly focusing on self-identifying gender, suggesting, among other things, that doing so could lead to inconsistencies with the Equality Act 2010 (where self-identified gender is not a protected characteristic) as well as more men by sex on boards (to the extent that they identify as women). Consequently, the FCA has removed references to self-identification in the Policy Statement, opting for companies to have a choice of reporting based on sex or gender identity.
Similarly, based on feedback on the use of ‘non-White’ in the FCA’s draft rules, the FCA has amended the language used in the target by instead referring to individuals from a ‘minority ethnic background’, which is defined to include those from an ethnic group other than a white ethnic group, as specified in categories recommended by the Office for National Statistics.
In addition to the targets, issuers will also have to set out in their statement:
- the reference date used, and where this is different from the reference date used in respect of the previous accounting period, an explanation of why; and
- any changes to the board between the reference date and the date on which the annual report is approved that have affected the company’s ability to meet one or more of the targets.
Publication of numerical data
Alongside the annual narrative ‘comply or explain’ disclosure, in-scope companies are also required to publish numerical data on the sex or gender identity and ethnic diversity of their board, senior board positions and executive management. The data is to be reported in a standardised table format which is included in Annex 2 to the LRs.
In the interests of transparency, issuers are also required to explain their approach to collecting the data. For example, companies should be clear about whether data is drawn from existing data sets (such as payroll data) or from self-reporting. LR 9.8.6IG and LR 14.3.36G set out the FCA’s expectations of what this explanation should cover as well as containing guidance on additional points in-scope companies might want to disclose in order to provide further context, including:
- a summary of policies, procedures and processes, and any wider context that contributes to improving diversity;
- any mitigating factors or circumstances which make achieving diversity more challenging; and
- any risks foreseen in being able to meet or continue to meet the targets, or plans to improve diversity.
Corporate governance statement
In addition to its amendments and additions to the LRs, the FCA is also changing DTR 7.2.8AR which requires in-scope companies to disclose in their corporate governance statement the diversity policy applied to their board, or to explain where no policy is applied. These changes are to expand the reporting requirements to:
- cover the diversity policies of key board committees (specifically audit, remuneration and nomination committees); and
- indicate that reporting on board and board committee diversity policies could consider wider diversity characteristics (for example, ethnicity, sexual orientation, disability and socio-economic background, supplementing those aspects the rule already references, including age, gender, and educational and professional backgrounds).
The FCA has also included guidance at DTR 7.2.8CG setting out that in-scope companies may, where they consider appropriate, include numerical data on the diversity of the board and board committees.
Importantly, there are adjustments available for issuers with board members or executive management situated overseas, closed-ended investment funds and sovereign controlled companies. In particular, recognising the concern that it may not always be possible for some companies with overseas operations to collect and process diversity data under local law, companies with directors and executive management based overseas are allowed to provide an explanation if they are unable to meet mandatory requirements in relation to numerical disclosures.
Ultimately, as businesses reflect on the lessons to be learned from the Covid-19 pandemic and its impact on the working environment, diversity and inclusion continue to be core areas of focus for investors and regulators. The Policy Statement reflects the FCA’s desire to speed up the pace of change on diversity and inclusion amongst listed companies, hopefully harnessing the progress already made under the UK’s existing voluntary initiatives. Given that voluntary initiatives such as the FTSE Women Leaders Review and Parker Review have concentrated on the FTSE 350, listed companies outside the FTSE 350 may find the targets in the updated LRs a significant challenge. Even for members of the FTSE 350, the figures flowing from the most recent FTSE Women Leaders Review showed that many companies still had significant work to do to achieve the (previous) targets that had been set, notwithstanding the positive overall headline. The Parker Review data shows a similar picture for ethnic diversity. We may therefore see a significant amount of ‘explanation’ when the disclosure requirements kick in next year.
The FCA will review the Policy Statement in three years’ time to assess its impact, but right now, in-scope companies should take note of the new rules and ensure that they are prepared to comply with them in their annual reports for financial years starting on or after 1 April 2022.
