The Financial Conduct Authority (FCA) has put forward a proposal requiring firms to provide statements detailing whether they have hit diversity targets, and where targets have been missed to explain why.
The FCA is consulting on changes to require listed companies to publish an annual ‘comply or explain statement’ on whether they have achieved certain targets for gender and ethnic minority representation on their boards.
As part of the same annual disclosure organisations must publish data on the make-up of their board and most senior level of executive management in terms of gender and ethnicity.
The ‘comply or explain’ statement targets include:
- That at least 40% of the board should be women, including those self-identifying as women.
- That at least one of the senior board positions (chair, chief executive officer (CEO), chief financial officer (CFO) or senior independent director) should be a woman, including individuals that self-identify as a woman.
- That at least one member of the board should be from a non-white ethnic minority background as defined by the Office for National Statistics.
- That as part of the same annual disclosure obligation, data on the make-up of their board and most senior level of executive management in terms of gender and ethnicity.
The FCA is also putting forward changes to its disclosure and transparency rules to require companies to ensure any existing disclosure on diversity policies addresses key board committees and also considers broader aspects of diversity.
This could include considerations of ethnicity, sexual orientation, disability, lower socio-economic background and other diversity characteristics.
The regulator is also encouraging companies to provide further data on the result of their diversity policies considering these wider aspects where possible.
The FCA said that because the proposed diversity targets are not mandatory for companies to meet it is not setting ‘quotas’, but it wanted them to provide “a positive benchmark for issuers to report against”.
Continuing diversity push
The changes follow the FCA’s discussion paper published earlier in July, exploring how to promote diversity and inclusion across the entire financial services sector.
The 12-week consultation closes on 22 October and subject to feedback and board approval, the regulator will seek to make relevant rules by the end of the year.
Commenting on the proposals, Clare Cole, director of market oversight at the FCA, said: “There is a current lack of standardised and mandatory transparency about diversity on listed company boards, particularly outside the FTSE 350 who do not provide data to the voluntary initiatives in this area,” she said.
“But interest from investors is growing and companies are increasingly focusing on this topic due to environmental, social and governance (ESG) investing, as well as wider social and public policy concerns.
“Our proposals are intended to increase transparency by establishing better, comparable information on the diversity of companies’ boards and executive committees.
“This will provide better data for companies and investors to assess progress in these areas and make investment decisions, reduce investor search costs, and inform shareholder engagement, enhancing market integrity.”
Cole noted the regulator expects enhanced transparency to strengthen incentives for companies to increase diversity on their boards and encourage a more strategic approach to diversity in their talent pipeline.
“This may have broader benefits in terms of the quality of corporate governance and company performance in due course,” she added.