FCA finalises rules for board diversity disclosures

The UK’s Financial Conduct Authority (FCA) has finalised long-awaited rules relating to the disclosure of the diversity and inclusion on company boards and executive committees.

The rules, set out in CP 21/24 ‘Diversity and inclusion on company boards and executive committees’, aim to improve transparency for investors around the make-up of company boards.

The FCA’s new rules now require issuers to include a statement within their annual financial report which makes clear whether they have met specific diversity targets within their board. The reporting requirements have been expanded to also include the diversity policies of key board committees.

The FCA hopes that these new rules, coupled with investor pressure, will encourage issuers to improve the diversity of their boards, which will likely have “benefits for corporate governance and decision making”.

What are the new diversity targets?

The new rules will require listed companies that fall within scope to meet the following targets and include them in their annual financial reports:

• At least 40% are women (including those that self-identify as women)
• At least one of the senior board positions (e.g. CEO, CFO, SID) is a woman (including those self-identifying as women)
• At least one board member is from a non-white ethnic minority background

Listed companies will also need to disclose a numerical table on the diversity of their board and executive managements within their annual financial reports.

Who will the rules apply to?

The FCA has said that the new disclosure rules should apply to companies with UK-listed equity shares or certificates representing equity shares, including closed-end investment funds and sovereign controlled commercial companies.

“Shell” companies and open-ended investment companies will be excluded from the rules on the basis that such disclosure rules “may be less relevant”. The FCA has also proposed changes to certain rules so that the disclosure targets could apply to certain UK issuers admitted to UK regulated markers as well as certain overseas listed companies.

What happens if you don’t comply?

The rules have been rolled out on a “comply or explain” basis. This essentially means that firms will be obliged to comply with the diversity targets or explain why they have not been able to meet them. As such, the rules are relatively soft, with little information being given as to what constitutes an acceptable or valid explanation, and what will happen to those who do not have one.

When do the rules come into effect?

The rules will apply to accounting periods starting on or after 1 April 2022. This means that the new disclosures will need to be included in annual financial reports published around Q2 2023 onwards. However, the FCA is encouraging companies to make disclosures as soon as possible, on a voluntary basis.

The policy will be reviewed in three years’ time to assess whether it has had an effect on the wider market.

CUBE comment

There is no doubt that the FCA’s new rules will raise some eyebrows. When Nasdaq proposed similar diversity rules last year, many argued it fell beyond their scope of responsibility. Indeed, this is an argument we often here with ESG-related diversity rules. When the SEC, for example, proposed climate-related disclosure rules, a number of its Commissioners at the time said that such disclosures fell outside the parameters of what a financial regulator should be paying attention to.

The argument that is commonly put across by those who do not condone such rules is that financial regulators should be focussing on regulatory issues that affect financial stability. Diversity and inclusion, they would suggest, is not one such issue.

Conversely, the counter argument is that investors should be equipped with all the information they need to make educated, informed decisions about businesses. In the past, investors may not have cared so much about Co2 emissions or the diverse make-up of a board, but that is no longer the case. Indeed, it has been shown that companies with diverse boards are more effective and more profitable. There is also the suggestion that companies and regulators should be reflective of the society in which they operate.

It is a contentious issue – that is not likely to change. What will change, however, is the regulatory requirements for in-scope listed companies.