Out-Law News | 26 Apr 2022 | 1:55 pm | 4 min. read
Companies will have to meet minimum targets (49 page / 644KB PDF) 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.
Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons said: “These targets are expressly a starting point which the FCA intends to ‘encourage scrutiny and consideration of diversity and inclusion more broadly’.”
“This means that although annual reporting is on a comply or explain basis, the expectation is of compliance or a clear explanation of how a company intends in short order to comply. This is similar in approach to the FCA's formal guidance on reporting against the Taskforce on Climate-related Financial Disclosures where, again, compliance is anticipated. Indeed, compliance alone is unlikely to be satisfactory to most investors: the question of how diversity will continue to improve is one which ‘good’ annual reports will address,” Proverbs-Garbett said.
Companies which will have to meet the new rules include UK and overseas companies with equity shares listed on either the premium or standard listing segments of the FCA’s Official List, excluding open-ended investment companies and ‘shell companies’ but including closed-ended investment funds and sovereign controlled companies.
The specific targets set by the FCA require at least 40% of board members to be women. A woman should hold at least one of the senior board positions – the chair, chief executive, senior independent director, or chief financial officer. At least one member of the board should come from a minority ethnic background.
In-scope companies will have to set out what reference date they are using, and any changes between the reference date and the date on which the annual report is approved which affected their ability to meet one or more of the targets.
Companies 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. However, following the consultation process, the FCA is allowing flexibility in the format of the table to allow companies to reflect their approach to data collection.
“The FCA has negotiated the current debate on the relationship between sex and gender by allowing in-scope companies flexibility in how they collect data and report, while requiring them to set out their methodology and to confirm that the approach taken has been applied consistently. This supports the FCA's aim of increasing transparency, ensuring investors are able to understand and compare data,” Proverbs-Garbett said.
“However, it means that a company is now responsible for deciding the basis on which it compiles and categorises data. 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,” Proverbs-Garbett said.
Equality law expert Francis Keepfer of Pinsent Masons added: “In-scope companies will need to tread the line carefully between ‘consistency, and consistent categorisation’ and allowing employees to self-identify their gender. The nature of gender self-identification means that companies are unlikely to get a ‘one size fits all’ response from their employees – you may have 10 different employees who self-identify their gender in 10 different ways, for example. In-scope companies will therefore need to be careful not to pigeonhole employees into certain categories in the interests of consistency”.
Those companies falling in scope of the new rules will also have to explain their approach to collecting data and the FCA has provided guidance on what this explanation should cover.
There is greater flexibility for companies with board members or management based overseas in relation to numerical disclosures, for example where local law prevents the collection or publication of relevant data. Meanwhile closed-ended investment funds and sovereign controlled companies will be able to adjust disclosures on senior board positions and numerical data disclosures in the event that these disclosures are inapplicable to the fund, provided they explain why.
Diversity and inclusion expert Kate Dodd of Pinsent Masons said: “Local laws in relation to data are complex, and vary considerably from jurisdiction to jurisdiction. There can also be a variation between what is legally allowed and what is culturally acceptable, and businesses should be very careful to ensure that they are not misleading investors by stating local practice as opposed to local law”.
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Whilst it may have been convincing last year to say that progress ‘takes time’, there is no doubt that results will be expected by now, and that data will be needed to show that those results are more than just rhetoric
Dodd added that the FCA’s focus on real-time data, as opposed to a historic emphasis on policies and mission statements, reflected wider trends.
“This applies at the most senior levels, with companies reporting a write down of equity by investors due to a failure to hit targets set by the Hampton-Alexander and Parker reviews on gender and ethnicity diversity respectively, and also at all levels, with customers and clients demanding clarity on the diversity of the teams who work on their accounts,” she said.
“The fact that it is now almost two years since the summer of 2020, when the Black Lives Matter movement reached such prominence, is creating a particular focus around race and ethnicity. Employees and communities are turning to businesses to ask what tangible progress has been made as a result of the initiatives and statements of intentions given at the time. Whilst it may have been convincing last year to say that progress ‘takes time’, there is no doubt that results will be expected by now, and that data will be needed to show that those results are more than just rhetoric,” she said.
In its guidance 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.
“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,” Proverbs-Garbett said.
The rules were proposed last year and will apply for annual reports from the current financial year (2022-23) onwards.
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