FCA urges companies to target minimum 40% women in boardrooms to boost diversity

Britain’s financial watchdog has proposed changing the rules for companies listed on the UK stock market to include a “comply or explain” requirement for not meeting diversity targets. 

The UK’s Financial Conduct Authority (FCA) put forward its proposals on diversity and inclusion. It proposed that at least 40% of company boards should consist of women, including those who self-identify as a woman. As of January 2021, women accounted for 36% of company board positions on the UK’s main FTSE 100, according to data from the Hampton Alexander review.

The financial regulator said it wanted listed companies to publicly disclose whether they had met specific board diversity targets in their annual financial statements and ensure that any existing disclosure on diversity considers broader aspects of it, which could include considerations of ethnicity, sexual orientation, disability, lower socio-economic background and other diversity characteristics. If not, companies would have to explain why they had failed to meet these goals, also known as a “comply or explain” requirement.

“This allows companies flexibility to provide relevant context on their approach to board diversity, whether or not these targets are met,” the FCA said.

In addition, the FCA said companies should have at least one woman holding the senior board positions of chair, CEO, senior independent director or chief financial officer.

The FCA also proposed that at least one member of a company’s board be from a non-white ethnic minority background. A report by Green Park Business Leaders, published in February, found that just 10 of the 297 people in the top three roles of FTSE 100 companies had ethnic minority backgrounds.

The proposals would apply to UK and overseas companies with equity shares in either the premium or standard listing segments of the FCA’s official list, while the disclosure and transparency changes apply to companies with securities traded on UK regulated markets.

Commenting on the initiative, FCA director of market oversight 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. 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.”

Cole believes that over time, FCA expects the 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. As a result, it will have broader benefits in terms of the quality of corporate governance and company performance in due course.

This proposal follows a recent discussion paper published earlier this month, exploring how to promote diversity and inclusion across the financial services sector as a whole.

The FCA is asking for feedback on its proposals, as part of its consultation period, which closes in October. It said it would seek to make any rules formal by late 2021.

The FCA’s proposals follow a push by US exchange operator Nasdaq to increase diversity among the 3,000 companies listed on its stock exchange. It filed a proposal in December asking the Securities and Exchange Commission (SEC) to approve new rules on the make-up of company boards. The Nasdaq proposed requiring the majority of companies to have at least two diverse board directors: one woman and one person who identifies as either an underrepresented minority or LGBTQ. It also put forward a “comply or explain” requirement.

However, the Nasdaq’s proposal had been delayed as the SEC took more time to review the plan.

Speaking in March at the launch of a charter on women in finance, FCA CEO Nikhil Rathi said that the Nasdaq had taken the lead with its listing rules and said the UK watchdog was exploring similar requirements. He said, “I would encourage all capital markets participants to consider the reasons why there are so few female CEOs and CFOs or CEOs and CFOs of colour presenting during IPOs or when capital is being raised — are there challenges in the culture of private equity, underwriting, equity syndication? What more can we do to sponsor and celebrate female business leaders and entrepreneurs?”

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