Diversity and inclusion describes the aim that female gendered individuals and those from differing ethnic backgrounds are present in the organisational framework of a company including at the top in Board positions.
It has a variety of benefits to companies and the workplace in general.
Diversity encourages competitiveness by ensuring companies attract a wider range of individuals. It reduces ‘group think’ at board level and unlocks talent. An increase in diversity and inclusion means better internal governance flows, because wider and differing views are present on the board. Following this there is improved decision making and risk management, and the view of the customer base is widened, including all parties, because a representative of those parties is now part of the board.
The FCA has launched consultation papers containing proposals to boost diversity and inclusion to support healthy work cultures in listed companies. The current consultation builds upon previous work undertaken in the Treasury’s Women in Finance Charter, Parker review and the FTSE Women Leaders Review.
This consultation is open until 18th December 2023 and final rules are planned for publication in 2024. They have also released a policy statement detailing requirements and disclosures to be made in financial years on or after 1st April 2022. The current listing rules targets are that:
- the board of a company will comprise of at least 40% women
- at least one of the chair, CEO, CFO or senior independent director is a woman; and
- at least one member of the board is from a minority ethnic background.
If a company does not meet these targets they must explain why this has occurred.
The FCA and PRA proposals in consultation are flexible to ensure all companies can comply whatever their size. However they must all:
- Develop a diversity and inclusion strategy setting out how the firm will meet their objectives and goals.
- Collect, report and disclose data relating to the board (currently this is against certain characteristics, in tabulated form and in the annual report).
- Set targets to address under-representation.
Good practice would ensure that these proposals are incorporated into current company plans and statements. More stringent requirements apply to larger companies, however there is an exemption from reporting where board members are overseas and local laws prevent the collection and publication of such data.
The current rules allow a brief summary of key policies, procedures and processes be included in the Annual Report, corporate Governance Section, which can be from a wider context, include any mitigating factors and any foreseen risks. Explanations must be given of how all data is collected and how a consistent approach has been taken. The description should cover any aspects of the policy concerning ethnicity, sexual orientation, disability and socio-economic background (in addition to age, gender and educational and professional background). Companies must disclose how their diversity policy is applied to key board committees.
A further benefit of the current consultation is that the FCA will be creating new rules and guidance on misconduct, like bullying and sexual harassment, make it clear that these pose a risk to a healthy work culture. With these aims and rules the FCA is communicating that non-financial misconduct is damaging to companies and to the UK’s reputation.
The overall aim of the drive towards diversity and inclusion is to attract and retain the best talent into companies and ensure that there are plans and reporting to confirm this and to prevent misconduct. This is a developing area with new regulations and the results of the consultation expected.
Companies should factor this development into their current and future practices, and we are here to assist with drafting board diversity policies against mandatory targets, reviewing and drafting the required information for annual report disclosures and in assessing the current regulations as they apply to your company.
Sources
- www.fca.org.uk – news/press announcements
- Herbert Smith Freehills – HSFnotes.com
- PwC Corporate Diversity: Law, targets and Corporate Governance (Compliance Magazine)
