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FRC report puts increased focus on ethnic diversity and ESG in UK boardrooms

Out-Law News | 18 Oct 2022 | 3:51 pm | 3 min. read

A new Financial Reporting Council (FRC) report on ethnic diversity among senior leadership of the UK’s large public companies signals the importance of increasing ethnic diversity as part of firms’ environmental, social and governance (ESG) priorities.

The FRC’s report (65-page / 3.48MB PDF) looked at ethnic diversity among senior leadership of FTSE 100 and FTSE 250-listed companies. It found that, while there are still significant challenges to be addressed, the need for change has been taken seriously by top decision makers, including senior managers, executive leaders, board chairs and executive search consultants.

The agenda for change has been particularly accelerated by increased awareness of the Black Lives Matter (BLM) movement in 2020. According to the report’s findings, BLM has caused a significant shift in the quality of conversations about organisational approaches to race and ethnic diversity. As a result, the actions and initiatives of companies and senior management teams are being reviewed with greater scrutiny.

The report also highlights an improvement in recruitment-related practices among large listed companies, such as more diverse interview panels and advertising roles using social media to target under-represented groups. Companies’ increasing use of executive search consultants to identify candidates from minority ethnic backgrounds and widening their search is another indication of the advanced agenda.

The report is the latest effort by the FRC in pushing forward increased ethnic board diversity at FTSE 350 companies, beginning with the Parker Review of ethnic diversity of UK boards in 2017. Led by Sir John Parker, the review steering group has set out its target of appointment of at least one director from a minority ethnic group on each FTSE 100 Board by 2021 and on each FTSE 250 Board by 2024.

However, the report shows that minority ethnic individuals still frequently experience barriers to progressing to the boards of FTSE 100 and FTSE 250 companies. Those challenges include being overlooked for promotion; overt and covert racism; and having to demonstrate higher standards to progress or have the same development opportunities as colleagues from majority backgrounds.

The report also looked at some of the shortfalls in reporting practices demonstrated by the annual reports of the largest listed companies. It found that that diversity initiatives, reporting and targeted programmes are often aimed at general diversity, rather than having a unique focus on ethnicity. There is also a weak link between reporting targets and performance metrics and how these reporting initiatives would help the business to meet its objectives.

Legal experts expect companies’ ESG reporting during the annual reporting cycle to increasingly move away from the traditional focus on climate change impacts.

“The FRC is continuing its stream of ESG themed publications, showing market and regulatory pressure to mature this agenda beyond a climate focus is increasing. Whilst many ESG agenda items are voluntary, the report underpins board diversity as a mandatory focus for listed companies under the 2018 Corporate Governance Code,” said equality law expert Kate Dodd of Pinsent Masons.

The latest FRC report makes detailed recommendations on dismantling the barriers and implementing good practice in a bid to increase the ethnic diversity of FTSE boards. The suggested improvements cover three main aspects: transparency; data collection, analysis and accountability; and creating a culture of trust within organisations and between individuals. 

“The report is a further reminder of the pivotal place of diverse representation in the recruitment process itself and diversity target setting followed up by data collection, monitoring and accountability. Although these encouragements are not new, progress still needs to be made. More detailed public reporting on ethnicity diversity at board level is also desired,” said Dodd.

“The report gives a current snapshot of the views and experiences of business leaders and insight into the depth of reporting and initiatives in annual reports. It is a very useful document that can be used for benchmarking purposes for listed companies and private companies who want to test themselves against the current market position on ethnicity and board diversity,” she said.

The Financial Conduct Authority (FCA), in its role as UK listing authority, issued ‘comply or explain’ rules on boardroom diversity earlier this year. The rules apply to accounting periods starting on or after 1 April 2022, meaning the new disclosures will start to appear in annual financial reports from the second quarter of 2023.

Last week, financial services employment law expert Anne Sammon of Pinsent Masons stressed the importance of fair practices, and effective communication with employees, by firms as they seek to tackle historic barriers to progression and improve diversity at senior levels.

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