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Diversity and inclusion on company boards and executive management

Insight 7 July 2022

Diversity and inclusion on company boards and executive management

On 20 April 2022, the Financial Conduct Authority (FCA) issued its final Policy Statement introducing new Listing Rules (the “Rules”) for listed companies to report information on their compliance on certain diversity and inclusion metrics at board and executive management levels.

The Rules will be applicable for accounting periods starting on or after 1 April 2022, meaning first annual reports with such disclosures would be those published from around Q2 2023 onwards. The FCA does, however, encourage companies with accounting periods starting from 1 January 2022 to include the disclosures brought in by the new Rules.

  • Entities in scope are UK and overseas issuers with equity shares, or certificates representing equity shares, admitted to the premium or standard segment of the FCA’s Official List. This scope includes closed-ended investment funds and sovereign controlled commercial companies
  • OEICs and shell companies for the standard listing segment are excluded, as well as issuers of listed debt, debt like securities, securitised derivatives and non-equity securities.

Board Composition

  • At least 40% of the board are women.
  • At least one of the Chair, CEO, Senior Independent Director (SID) or CFO is a woman.
  • At least one member of the board is from a minority ethnic background.

Annual Financial Reports (AFR)

  • Comply or explainstatement in Annual Financial Reports on whether specific board diversity targets have been met.
  • Numerical data sets, as shown in the Reporting Tables further below.
  • Additional information to include:
    • Reference date used, and an explanation of why a different date would have been used compared to the previous accounting period, and
    • Any changes to the board that have occurred between the reference date and the date on which the annual financial report is approved that have affected the company’s ability to meet a target.

Additional Guidance in AFR

(optional)

  • Summary of policies, procedures and any wider context that contributes to improving board and executive management diversity.
  • Mitigating factors or circumstances which make achieving diversity on its board more challenging.
  • Risks foreseen in being able to meet the board diversity targets in the next accounting period, or any plans to improve board diversity.

Other points

  • Approach to data collection: Issuers to explain their approach to collecting the data, as well as the data sources needed for reporting. The FCA, to that effect, included guidance in LR 9.8.6I G and LR 14.3.36G on the expectations of what the explanations should cover. The parameters for the data collected for disclosure purposes are not prescribed but should be objectively justifiable and consistent.
  • Issuers with overseas board members/executive management: Closed-ended investment funds and sovereign controlled companies will be permitted to adjust their disclosures on senior board positions and their numerical data disclosures if these disclosures are inapplicable, provided they set out the reasons why the disclosures are inapplicable.

Changes to corporate governance rules

The FCA also included changes to the Disclosure Guidance and Transparency Rules sourcebook, more specifically DTR 7.2.8AR which currently focuses on issuers’ diversity policies. The changes being brought in the diversity policy requirements include:

  • Wider diversity aspects to be considered (e.g. sexual orientation, socio-economic background, and disability), and
  • Extend the application of the diversity policy (where such a policy is applied) to include policies of key board committees (audit, remuneration and nominations).

The FCA added templates to help comply with the numerical data sets required in the AFRs:

Table 1: Reporting table on sex/gender representation

 

Number of board members

Percentage of the board

Number of senior positions on the board[1]

Number in executive management

Percentage of executive management

Men

Women

[Other categories][2]

Not specified/Prefer not to say

Table 2: Reporting table on ethnicity representation

 

Number of board members

Percentage of the board

Number of senior positions on the board[3]

Number in executive management

Percentage of executive management

White British or other White (including minority-white groups)

Mixed/Multiple Ethnic Groups

Asian/Asian British

Black/African/ Caribbean/Black British

Other ethnic group, including Arab

Not specified/ prefer not to say

[1] CEO, CFO, SID and Chair

[2] The FCA left flexibility in the format of the prescribed table for reporting on sex or gender identity, in order for companies to reflect their approach to data collection.

[3] CEO, CFO, SID and Chair

The FCA’s approach in gathering more and more numerical data highlights a trend that compliance statements, policies and procedures are no longer sufficient to evidence compliance with Diversity and Inclusion frameworks. With the flexibility in approach to gathering data allowed by the FCA, boards will need to pay close attention in developing a framework to ensure collection of data is consistent.

The rules reflect the growing scrutiny on D&I (and more generally, ESG) by investors and markets, and is not only limited to the UK as, for example, the NASDAQ will introduce Board Diversity rules from 8 August 2022. Interestingly, on 7 June 2022, the EU finally agreed on its “Women on Boards” directive which will impose minimum female representation on boards from 30 June 2026.

With the introduction of a new and defined framework, we could also see such metrics starting to be required by investors in other sectors that are not covered by the Listing Rules. Looking forward into 2022, and further to the FCA’s joint paper with PRA and the Bank of England, it is expected that a further consultation on D&I proposals will be published later this year and is expected to build upon and reinforce the existing D&I legislation.

To discuss how Sanne can assist you or your business, reach out to Paul and Anne-Marie directly.

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Paul Séjournant Director, Product Development - United Kingdom
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Anne-Marie Wells Associate Director - United Kingdom
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