The FCA has finalised rules requiring UK listed companies to set out in their annual reports whether they have met board diversity targets. Firms will have to meet minimum for the representation of women and people from a minority ethnic background on their boards and in their senior executive teams, or explain why they have not done so. The FCA will not be setting ‘quotas’ for companies to meet as the listing rule diversity targets are not mandatory. Instead it will provide a positive benchmark for issuers to report against.
Kate Dodd and Tom Proverbs-Garbett cover this in their Outlaw article ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’. Firms will also have to publish numerical data on the sex or gender identity and ethnic diversity of their board, senior board positions, and executive management in a table. Tom points out that it means that a company is now responsible for deciding the basis on which it compiles and categorises data. He says: ‘putting the onus on corporates may mean they need to seek advice, especially around equalities legislation and data protection issues, adding to the cost of reporting.’ He says this approach supports the FCA’s aim of increasing transparency, ensuring investors are able to understand and compare data and so make investment decisions based on that.
The FCA has also recommended that companies should report on any other practices or policies they feel contribute to improving the diversity of their boards and executive management, as well as any mitigating factors or circumstances which make achieving diversity on its board more challenging and any risks in becoming compliant in the future. Tom says: ‘This may be obvious, but its inclusion as formal guidance means that investors will be looking for this forward-looking material, requiring a level of policy or planning maturity that some companies may struggle with.
So why might that be a problem? Earlier, Anne Sammon joined me by video-link and I put that question to her:
Anne Sammon: “I think a lot of HR professionals within the FS sector were concerned by the diversity and inclusion discussion paper that the PRA, FCA and Bank of England published last year which suggested that they might start to gather data themselves from firms around how they were doing on different diversity characteristics and that led to a lot of discussion around well, how do we measure progress around diversity because there are nice, easy kind of simplistic ways of doing it by looking at, for example, how many women have you got in senior positions and how many women do you have across the organisation but sometimes those measures don't really give a full picture of what your firm is doing, where your starting point was, you know, whether you're in a sector where it's far more difficult to recruit women into, or whether there are other factors that might be at play and so working through how as an organisation, you're going to look at how you're measuring your progress is really important and, again, it's something that we see a lot of clients coming and wanting some advice on to make sure that they're not overstepping the mark when it comes to things like positive discrimination.”
Joe Glavina: “You say ‘positive discrimination’ – why is that a problem in this context?
Anne Sammon: “So I think with all the focus around the FCA’s targets, for women in particular, on a board-level positions, at senior positions, there is a risk that you may find that that certain people who don't share those characteristics are going to feel that they are being disadvantaged by this and that, potentially, there is a degree of positive discrimination occurring on the basis that firms will want to show that they are making progress in those areas and, therefore, for example, female candidates might be pushed through at a faster rate than male candidates, and I think the balance here is about firms ensuring that their processes are fair, that they're looking at those kinds of systemic barriers and ways to remove them, but also the communication around this is really important. So it's making sure that that the communications that go out are sensitive to the fact that some of your employees may feel that these new measures may disadvantage them and, again, seeking external input in terms of where are the risks, where's the boundary between positive discrimination and positive action and what's lawfully allowed under the Equality Act is really important.”
That article by Kate and Tom is called ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’. It is available now for viewing from the Outlaw website.