The City regulator is consulting on proposals to improve transparency for investors on the diversity of listed company boards and their executive management teams.
The Financial Conduct Authority (FCA) has proposed changes to its listing rules to require listed companies to annually publish a ‘comply or explain statement’ on whether they have achieved certain proposed targets for gender and ethnic minority representation on their boards.
In addition, the FCA wants these firms to annually publish data on the make-up of their boards and most senior level of executive management in terms of gender and ethnicity.
This follows the FCA publishing a joint discussion paper with the Bank of England and Prudential Regulation Authority, setting out policy options on improving diversity.
In March, FCA chief executive Nikhil Rathi warned that the regulator will act when it doesn’t see improvements in firms’ diversity, while working to meet the gender equality targets that it has also missed.
The FCA is also proposing changes to its disclosure and transparency rules to require companies to ensure any existing disclosure on diversity policies addresses key board committees and also considers broader aspects of diversity. This could include considerations of ethnicity, sexual orientation, disability, lower socio-economic background and other diversity characteristics.
The FCA is not setting ‘quotas’, but said it is providing a positive benchmark for issuers to report against and is also encouraging companies to provide further data on the results of their diversity policies.
“There is a current lack of standardised and mandatory transparency about diversity on listed company boards, particularly outside the FTSE 350 which do not provide data to the voluntary initiatives in this area,” said Clare Cole, director of market oversight at the FCA.
“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.
“Our proposals are intended to increase transparency by establishing better, comparable information on the diversity of companies’ 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.
“Over time, we expect 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.”
“This is a significant step towards transparency in the sector,” said Sarah Ozanne, an employment lawyer with CMS.
“The proposals link in with the FCA’s priorities to drive market efficiency by enabling investors visibility on issues which are increasingly driving investment decisions.”
The FCA is consulting for 12 weeks on these proposals, with a closing date of 22 October 2021. The regulator will seek to make relevant rules by late 2021, subject to consultation feedback and FCA board approval.