Balance on the board: Eight things UK PLCs need to know about the FCA's diversity targets

The Financial Conduct Authority's proposals will mean UK listed companies need to disclose whether their boards and senior management teams meet new gender and ethnic diversity targets.

1. Which companies will the disclosure requirements apply to?

   The proposals will apply to all UK and overseas companies with shares listed on the premium or standard segment of the FCA's Official List. AIM companies are outside of the scope of the new rules.

2. When will the new rules come into effect?

   If adopted, the rules will apply to accounting periods beginning on or after 1 January 2022 and would require disclosure in annual financial reports published from spring 2023.

3. What disclosures will companies need to make under the rules?

   Listed companies will need to include in their annual financial reports:

   • a 'comply or explain statement' on whether they meet the FCA's targets (see below) for gender and ethnic minority representation on the board of directors;
   • any changes to the board that have materially affected the company’s ability to meet one or more of the targets;
   • details (numbers and percentages) on the gender and ethnic diversity of individuals on the board, senior board positions (Chair, CEO, CFO and Senior Independent Director), and the executive management team; and
   • as part of the corporate governance statement, a description of how the company's diversity policies apply to the remuneration, audit and nominations committees of the board (as well as to the board itself).

   The FCA proposes that "executive management" will include the executive committee or the most senior executive or managerial body below the board (or where there is no such formal committee or body, the most senior level of managers reporting to the chief executive), including the company secretary but excluding administrative and support staff.

   The new rules will also clarify that a company's corporate governance statement must describe the company's diversity policy on ethnicity, sexual orientation, disability and socio-economic background in addition to age, gender, and educational and professional backgrounds as required under the existing rules.

4. What are the proposed diversity and inclusion targets?

   Companies will need to disclose whether they have met the following targets:

   • at least 40% of the board are women (including individuals self-identifying as women);
   • at least one of the senior board positions (Chair, CEO, CFO and Senior Independent Director) is held by a woman (including individuals self-identifying as a woman); and
   • at least one member of the board is from a non-white ethnic minority background (as categorised by the UK Office for National Statistics[1]).

5. What will happen if a company fails to meet these targets?

   Similar to other 'comply or explain' requirements, each company will need to disclose if it has failed to meet any of the diversity and inclusion targets and the reasons for not meeting those targets. However, failure to meet the targets will not be breach of the Listing Rules.

6. What level of data on diversity needs to be disclosed?

   Companies will need to disclose the number of board members using specified categories for gender and ethnicity, the relevant percentage of the board, the number of senior positions on the board represented, the number of executive management positions represented and the percentage of executive management. This information must be set out in a table in a prescribed format (set out in the FCA's consultation paper).

7. Where will the new rules be set out?

   The FCA is proposing to amend the Listing Rules (LRs) and Disclosure Guidance and Transparency Rules (DTRs), in particular LR 9.8 (Annual financial report), LR 14.3 (Continuing obligations) and DTR 7.2 (Corporate governance statements). Draft text for the new rules is set out in an appendix to the FCA's consultation paper (CP21/24).

8. Why is the FCA introducing these new rules?
   The FCA hopes to increase transparency for investors on the diversity of boards and executive management of UK listed companies. It notes that similar disclosure requirements are being introduced in other jurisdictions, including NASDAQ's US Exchange.

   The proposed rules continue the trend of increased non-financial disclosure requirements for UK listed companies. In January 2021, the FCA introduced requirements for listed companies to confirm if they followed the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) (see our Blog for details).

   The FCA's consultation closes on 20 October 2021 and it expects to finalise the rules by late 2021.