Diversity reporting obligations seem to have been under constant review in the last few years and a recent report from BEIS has identified progress to date whilst also highlighting areas of deficiency. With a range of existing targets, guidance and call to arms, this article takes stock of the current position in the UK and future proposals.
Summary of current voluntary recommendations by size of company:
|Size/Type of company
||Cumulative (voluntary) recommendations for board composition on gender
||Cumulative (voluntary) recommendations for board composition on ethnicity
- Minimum 33% women’s representation across leadership teams (the Executive Committee and direct reports) by 2020
- At least one director of colour by 2021
- Nomination committees to ensure that qualified people of colour are identified and considered for appropriate board vacancies
- The relevant gender-based principles in the “Standard Voluntary Code of Conduct” for executive search firms to be extended to the recruitment of minority ethnic candidates as board directors
- Develop a pipeline of board capable candidates, and
- Include transparent reporting of targets in annual reports.
- Minimum 33% women’s representation across leadership teams by 2020
- At least one director of colour by 2024, and recommendations as set out above
- Increase number of women in roles of Chairs, Senior Independent Directors and Executive Directors to achieve 33% women representation by 2020
- The Nominations Committee to review actions plans and assess progress made to improve women’s representation in leadership roles at least annually
- All CEOs to take action to improve the under-representation in leadership roles, and
- Publish details of the number of women in leadership roles on an annual basis.
The table above is a high-level overview but in more detail:
The Hampton-Alexander Review focusses on gender diversity of UK boards of directors for the FTSE 350 companies. In addition to the targets themselves:
- The Chair of the Nominations Committee should take an active role in overseeing the progress made to improve women’s representation in leadership roles. At least once a year the Nominations Committee should review actions plans and assess progress.
- All CEOs should act to improve the under-representation of women on the Executive Committee and in the layer immediately below (direct reports to the Executive Committee), together identified as the leadership team.
- Each Company should voluntarily publish details of the number of women on the Executive Committee and their direct reports, on an annual basis.
The Lord Parker Review calls for action on the ethnic diversity of UK boards and has voluntary targets for FTSE 100 and FTSE 250 companies:
Increase the Ethnic Diversity of UK Boards
- Each FTSE 100 board should have at least one director of colour by 2021.
- Each FTSE 250 board should have at least one director of colour by 2024.
- Nomination Committees of all FTSE 100 and FTSE 250 companies should require their internal human resources teams or search firms to identify and present qualified people of colour to be considered for board appointment to vacancies.
- The principles in “Standard Voluntary Code of Conduct” for executive search firms (applicable to gender-based recruitment) should be extended to apply to the recruitment of minority ethnic candidates to board positions in FTSE 100 and FTSE 250 companies.
Develop the pipeline & plan for succession
- Companies should develop mechanisms to identify, develop and promote people of colour within their organisations to ensure, over time, a pipeline of board capable candidates.
- With a view to getting candidates board ready, the Review says these companies should encourage and support candidates drawn from diverse backgrounds, including people of colour, to take on board roles internally (eg subsidiaries), as well as board and trustee roles with external organisations (for example, educational trusts, charities and other not-for-profit roles). These opportunities will give experience and develop oversight, leadership and stewardship skills.
Enhance transparency & disclosure
- A description of the board’s policy on diversity should be set out in a company’s annual report, and include a description of the efforts to increase, ethnic diversity within its organisation, including at board level; and companies that do not meet board composition recommendations by the relevant date should explain in their annual report why they have not been able to achieve compliance.
New financial reporting council requirements
The FRC changes to the UK Corporate Governance Code on diversity identifies further requirements that will build on these previous Reviews and will apply to a company with a premium listing of equity shares on the London Stock Exchange. Also, under discussion is a plan to extend some aspects of the new Code to large private companies.
Composition, success and evaluation of board
Under Principle J, appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be in place for board and senior management. Both appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.
Further, Principle K states that regular evaluation of the board should consider the balance of skills, experience, independence and knowledge, its diversity and how effectively members work together to achieve objectives. Individual evaluation should demonstrate whether each director continues to contribute effectively.
These new provisions are underpinned by reporting requirements which will have to identify how diversity is being addressed.
The annual report should describe the work of the nomination committee and include:
- A description of how the board evaluation has been conducted, detailing the outcomes, actions taken and how it has influenced board composition.
- The process used in relation to appointments and approach to succession planning as well as how these support building a diverse pipeline with reference to Principle J.
- What other actions have been taken to oversee the development of a diverse pipeline for future succession to board and senior management appointments.
- An explanation of how diversity supports the company in meeting its strategic objectives.
- The gender balance of those in the senior management and their direct reports.
The revised Corporate Governance Code will be applicable to all companies with a premium listing of equity shares on the London Stock Exchange, whether they are incorporated in the UK or elsewhere, and applies to accounting periods beginning on or after 01 January 2019.
Other measures and commitments
Include details on diversity on the board of directors in annual reports from 2018 onwards
Under the EU Directive 2014/95/E on Non-Financial Reporting, UK companies are required to include details on diversity on the board of directors in annual reports from 2018 onwards. The FCA Handbook and the Disclosure Guidelines and Transparency rules also outline corresponding reporting requirements.
The FCA has been highlighting the importance of diversity recently in the context of the culture of regulated firms, risk issues and the new SMCR regime. The FCA Handbook includes requirements on common platform firms’ Nomination Committees to ensure a broad set of qualities and competences are adopted when recruiting members to the management body. It also puts in place a policy promoting diversity on the management body, sets a target for underrepresented gender in the management body and outlines how to meet that target.
Broader diversity issues must be addressed with certain large listed companies being required by the FCA to include a description of the diversity policy applied to their board of directors, in their corporate governance statement, covering aspects such as age, gender or educational and professional backgrounds (see Disclosure Guidance and Transparency Rules (DTR) which apply to financial years beginning on or after 01 January 2017).
This rule does not apply to listed companies which qualify as small or medium companies under the Companies Act 2006 or issuers which do not have shares admitted to trading on an EU regulated market, unless the issuer has issued shares which are traded on an EU multilateral facility. Further, this rule does not explicitly include diversity reporting so the FCA proposes amending the wording so this flexibility in reporting also applies to information on diversity.
In July 2018 the FCA also issued Policy Statement 18/14 in which it acknowledged the various initiatives at UK and EU level on diversity (including those on firms in MiFID and CRD) and has said that rather than explicitly use the new SM&CR regime to address diversity on boards, the FCA’s supervision teams will continue to impress on senior management the importance of diversity in their teams and ask about gender firm’s diversity policies.
McGregor-Smith Review, “Race in the workplace”
The 2017 McGregor-Smith Review that has been published includes a list of 26 recommendations for increased racial inclusion in the workplace including that listed companies and all businesses and public bodies with more than 50 employees should publish five-year aspirational targets and report against these annually. It also called on all organisations to ensure that employees undertake unconscious bias training and businesses that employ more than 50 people to identify a board-level sponsor for all diversity issues, including race. The appointed individual should be held to account for the overall delivery of aspirational targets.
Charters: Women in Finance & Tec Talent Charter
Finally, the Women in Finance Charter represents a government led effort to encourage gender balance at all levels across financial services firms. The signatories to the Charter pledge to promote gender diversity by:
- Having one member of the senior executive team responsible and accountable for gender diversity and inclusion.
- Setting internal targets for gender diversity in senior management.
- Publishing progress annually against these targets in reports on the company website.
- Having an intention to ensure the pay of the senior executive team is linked to delivery against these internal targets on gender diversity.
A similar initiative has also been launched through the Tech Talent Charter: The Tech Talent Charter takes a wider view and asks signatories to commit to targets and more diverse engagement in the technology sector, again with aspirational targets, reporting requirements and a specific reference to ensuring women are on shortlists.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.