Diversity and Inclusion  

FCA proposes 'comply or explain' diversity rule for listed firms

FCA proposes 'comply or explain' diversity rule for listed firms

The Financial Conduct Authority has proposed changes to its listing rules as a way of improving transparency on the diversity of listed company boards and their executive management teams. 

The regulator is consulting on rules to require companies to disclose annually on a comply or explain basis whether they meet specific board diversity targets and to publish diversity data on their boards and executive management.

The FCA will not be setting ‘quotas’ for companies to meet as the listing rule diversity targets are not mandatory. Instead it will provide a positive benchmark for issuers to report against. 

The proposed benchmarks are at least 40 per cent of the board to be women, at least one of the senior board positions (chair, chief executive officer, chief financial officer or senior independent director) to be a woman and at least one member of the board to be from a non-white ethnic minority background.

The FCA is also proposing changes to its disclosure and transparency rules to require companies to include key board committees and consider broader aspects of diversity. 

This could include ethnicity, sexual orientation, disability, lower socio-economic background and other diversity characteristics. 

Key board committees include those required under the UK Corporate Governance Code, specifically committees on audit, remuneration and nominations. 

Clare Cole, director of market oversight at the FCA, 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.”

The FCA is also encouraging companies to provide further data on the result of their diversity policies considering these wider aspects where possible.

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, such as the main market of the London Stock Exchange.

Cole added: “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.”

Building on progress

The FCA said its proposals aimed to build on progress achieved under existing initiatives to improve diversity on the boards of the largest UK companies.