FCA launches diversity drive for listed companies

5 Aug 2021

City watchdog tables proposals to support investors by improving boardroom transparency, finds Andrew Holt.

Supporters of greater diversity in investment and finance have a new and powerful advocate.

The Financial Conduct Authority (FCA), the UK’s financial watchdog, has launched a consultation on improving transparency on the diversity of listed company boards and their executive management teams. 

The FCA is consulting on changes to its listing rules which could require listed companies to publish an annual statement on their progress in gender and ethnic minority representation in the boardroom.  

The proposed targets mean that at least 40% of directors should be women, and at least one member should be an ethnic minority.

A women should also hold one of the senior board positions – chair, chief executive, chief financial officer or senior independent director.

The FCA is also proposing that policies should consider broader aspects of diversity, such as sexual orientation, disability and socio-economic background.

The FCA also encourages companies to share the results of their diversity policies, considering these wider aspects where possible.

Not mandatory

Although the consultation will be seen as an important step forward by diversity campaigners, the listing rule diversity target will not be mandatory. So, the watchdog is not setting a ‘quota’ – but instead providing a benchmark for issuers to report against. 

Another issue is that the FCA’s approach will provide flexibility for overseas companies, since the ‘comply or explain’ approach allows any national or cultural context to be explained.

This has proven problematic for some institutional investors when it came to the ‘comply or explain’ rule applied to the governance code and climate-related disclosures, with investors finding the explanations given by some companies for non-compliance unsatisfactory.   

The proposals though will apply to UK and overseas companies with shares in either the premium or standard listing segments of the FCA’s ‘official list’, while the disclosure and transparency changes apply to companies with securities traded on UK regulated markets, such as the main market of the London Stock Exchange.

Deeper diversity reporting

And while some companies already provide diversity disclosures to existing voluntarily UK initiatives and in annual reports, the FCA believes its measures will help ensure reporting beyond the largest listed companies and ensure more consistency. 

Clare Cole, the FCA’s director of market oversight, said of the proposals: “There is a current lack of standardised and mandatory transparency about diversity on listed company boards, particularly outside the FTSE350 who do not provide data to the voluntary initiatives in this area. 

“But interest from investors is growing and companies are increasingly focusing on this topic due to ESG investing, as well as wider social and public policy concerns.”  

Cole was also keen to stress that the FCA’s proposals intend to increase transparency by establishing better, comparable information on the diversity of company 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,” she noted. 

Cole also suggested that over time, the FCA expects enhanced transparency may strengthen incentives for companies towards greater diversity on their boards and encourage a more strategic approach to diversity in their pipeline of talent.

“This may have broader benefits in terms of the quality of corporate governance and company performance in due course,” she said.  

The FCA’s proposals aim to build on existing initiatives to improve diversity on the boards of the UK’s largest companies. Such initiatives include the Hampton-Alexander Review and Parker Review, and similar initiatives in international markets.   

The FCA is now consulting on these proposals until 22 October. Subject to the consultation and FCA board approval, the rules will be implemented before the end of the year.

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