FCA publishes final diversity disclosure rules for directors and executives

Overview 

As part of its broader focus on diversity and inclusion, the FCA has published its final rules on diversity and inclusion on listed company boards and executive committees.

The rules require certain diversity disclosures in listed companies’ annual reports and accounts for financial years commencing on or after 1 April 2022. The objective of these new rules is to provide greater transparency, standardisation and comparability of diversity data so that investors and other stakeholders can assess a company’s performance and measure progress over time.

In addition, this summer, the FCA is expected to publish its final rules for diversity and inclusion in the financial services firms it regulates.

New board diversity targets for listed companies

The new rules focus on two diversity strands: gender and ethnicity. It has been made clear that this is only the starting point; other diversity strands are encouraged, and expanding the rules to cover such additional strands will be considered when the rules are reviewed in three years’ time.

The rules require a narrative disclosure against prescribed diversity targets at board level, the publication of certain numerical data on diversity at board and executive level, and include certain changes (or encouraged changes) as to how companies report on their board diversity policies.

The new targets, to be disclosed on a “comply or explain” basis in listed companies’ annual reports, require a minimum of 40% of the board to be women, with at least one in the role CEO, CFO, Chair or SID, and one board member to be from an ethnic minority background excluding white ethnic groups.

Same old or something new?

Gender and ethnicity targets are not new for listed companies since the Hampton Alexander and Parker reviews, although these have been voluntary initiatives. The demand for greater and more uniform transparency is not restricted to the UK either; for example similar moves have recently been made by Nasdaq (and approved by the SEC).

What is new though is that the FCA is now being prescriptive about how these targets are presented in annual reports so it will be easier for investors and other interested parties to compare diversity progression across previous years and against other companies. Alongside the annual narrative comply or explain disclosure, companies will be required to publish numerical data on the sex or gender identity and ethnicity of the board and executive management in a standardised table format. Flexibility is permitted in the format of the table and the approach to data capture but this too will need to be explained and applied consistently.

What should listed companies be doing now?

The clear message from the FCA is to start preparing now. Although the new rules apply to financial years from 1 April 2022, voluntary reporting is being encouraged for companies whose periods start on or after January this year. 
In light of the new rules, we recommend:

• There is no need to start with a blank canvas in terms of data capture; consider how this is currently done, whether there are any gaps and if processes are sufficiently robust, and analyse where improvements can be made. Remember that a listed company’s approach to data collecting, including the method of collection and/or the source of the data, will need to be explained in the annual report, and must therefore withstand scrutiny.
• While positive discrimination is unlawful in working towards targets, positive action is permitted. Those making appointment and recruitment decisions need to know the difference and ensure that the rationale is carefully documented.
• As has been flagged by the FTSE Women Leaders review, one important way to build sustainable change at board level is to look to the pipelines below board and executive committee level. Looking at mechanisms to recruit and retain diverse talent should not be confined to the board and executive committees, and must necessarily look across the organisational hierarchy.
• Be clear on your approach to collection of numerical data; i.e. will you collect data on sex or gender identity? Either are permitted in the UK, and much may depend on your current approach to data capture.
• Achieving targets is a work in progress with success being dependent on numerous factors, policies and practices, including succession planning, D&I initiatives, and targeting and mentoring the next generation of leaders.
• The new rules carry regulatory enforcement risks if breached. Allocating responsibility to someone to take steps to ensure that the reporting and disclosure requirements are met will help mitigate these risks.
• Start working on your annual report disclosures sooner rather than later. Although the disclosure requirements on diversity are new, they are, in some ways, a continuation of the existing requirements under the UK Corporate Governance Code on culture and workforce engagement. Crafting meaningful disclosures which satisfy the new requirements might well leverage and build upon wording from previous years’ annual reports on these topics.

Over the coming months, our corporate, employment and regulatory teams, along with A&O Consulting, will be publishing further insights into the diversity disclosure rules for directors as well as the PRA and FCA’s final rules on diversity and inclusion in financial services when they are published.