The Financial Conduct Authority has proposed benchmarks should be set to encourage the appointment of more women and people from ethnic minorities to the leadership of the UK’s largest firms.
It said that at least 40% of board members should be women. At least one of the senior board positions (chair, chief executive officer, chief financial officer or senior independent director) should be a woman, the FCA proposed, and at least one member of the board ought to be from a non-white ethnic minority background.
Companies are increasingly focusing on [diversity] due to ESG investing, as well as wider social and public policy concerns” – Clare Cole, director of market oversight at the FCA
The proposals are being consulted on until the autumn and are part of a drive to improve governance, ensure City firms become more transparent, avoid the dangers of groupthink, and to embed more fairness in recruitment.
According to the FCA the proposals were made in the context of initiatives to “promote greater diversity on listed company boards, increasing scrutiny of companies by investors looking at environmental, social and governance factors, and a desire for better data to inform decisions”. Academic studies suggested that greater diversity on boards had positive effects on corporate governance and corporate performance, the FCA said.
The UK’s top 350 listed companies have generally met a target of 33% women on their boards, but have not yet achieved a target that each FTSE 100 board should have at least one director of colour by 2021.
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Changes to the FCA’s disclosure and transparency rules, which would require companies to include key board committees and consider broader aspects of diversity including lower socio-economic background and disability, also form elements of the proposals.
Key board committees include those required under the UK Corporate Governance Code, specifically committees on audit, remuneration and nominations.
Director of market oversight at the FCA, Clare Cole, said: “There is a current lack of standardised and mandatory transparency about diversity on listed company boards, particularly outside the FTSE 350 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.
“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.”
Once the public consultation is complete, the proposals could start being implemented later this year and will affect 1,106 companies who will be expected to meet the targets or explain to shareholders in their annual reports why they have fallen short.
“We may also seek to widen the scope of the targets to levels below executive management,” the watchdog said.
Law firm GQ|Littler, responding to the FCA proposals, said firms must be careful to tread the fine line between positive action and positive discrimination in trying to meet these targets, ensuring that all recruits are properly qualified. Positive action that firms can take include offering training to certain under-represented groups, said the firm.
Sophie Vanhegan, partner at GQ|Littler, told Personnel Today: “These proposals are undoubtedly a step in the right direction; we would hope to see further action taken to improve diversity in other areas such as sexual orientation and socio-economic background as a next step.”
“Gender diversity has been a major area of focus for financial services firms in recent years, and whilst great progress has clearly been made, the FCA rightly recognises that there is still more to do, particularly in terms of getting women into the most influential board positions.”
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The FCA’s consultation will end on 20 October.
