Diversity on the boards of UK-listed companies: What are the challenges & benefits of complying?

Board diversity and inclusion have increasingly become focal governance points for UK-listed companies following the introduction of the new listing rules from the Financial Conduct Authority (“FCA”) from financial years starting on or after 1 April 2022. These changes are designed to promote a more extensive consideration of diversity at board level by increasing disclosure obligations for in-scope companies. Holly O’Neill, Assistant Manager and Company Secretary at Ocorian, outlines the challenges and benefits of complying. 

Which listed companies do the diversity rules apply to?

The rules apply to UK and overseas issuers with equity shares admitted to the premium or standard segment of the FCA’s Official List, including closed-ended investment funds and sovereign-controlled companies. 

What are the requirements of UK-listed companies regarding the diversity of the board of directors?

In-scope, listed companies are required to provide the following information in the company’s annual financial report:

• a “comply or explain” statement detailing whether 

1. its board comprises at least 40% women, 
2. at least one senior position on its board (i.e., chair, senior independent director, CEO or CFO) is held by a woman, and 
3. at least one individual on the board is from a minority ethnic background, and

• numerical data on the ethnic background and gender identity of board members and its executive management, as applicable.

If a company has not met some or all of these targets, it is required to explain this in its annual financial report and provide reasons for not reaching these targets.

In addition to this, amendments to the disclosure guidance and transparency rules (“DTRs”) necessitate in-scope companies to consider more comprehensive diversity characteristics as part of their diversity policy reporting, such as disability, socio-economic background and sexual orientation.  

The importance of diversity and inclusion for FTSE 350 boards is further bolstered by the voluntary targets concerning ethnic diversity introduced by the Parker Review Committee. The aim of the Parker Review is to encourage a more proactive approach to the improvement of the ethnic and cultural diversity of UK boards by establishing a percentage target for ethnic minorities in their senior management teams, to be achieved by December 2027. 

What is the current landscape of board diversity?

While there remains a significant gender gap on boards, especially within leadership positions, progress has been made in improving gender diversity, as women representation on FTSE 350 board has now reached 42% (as of February 2024). Women’s representation in leadership roles on FTSE 350 boards currently sits at 35% and companies are strongly encouraged to bolster their efforts to reach the 40% women in leadership target by the end of 2025 from The FTSE Women Leaders Review. Ethnic diversity on boards lags behind gender diversity and the lack of representation of minorities poses challenges in terms of fostering inclusivity and highlights the need for more inclusive recruitment and promotion practices. While there is often a focus on demographic diversity, skill diversity is equally crucial. Boards better benefit from a mix of skills, including finance, investment expertise, legal knowledge, and technology acumen.

What are the challenges to developing board diversity?

Boards often rely on existing networks and traditional recruitment methods, which may limit access to diverse candidates and in some industries, there may be a limited pool of diverse candidates with the requisite skills and experience, making it challenging to achieve diversity goals. Unconscious biases can also influence decision-making processes, leading to the preference of candidates who align with the existing board's demographics or characteristics. 

Additionally, companies may lack clear diversity policies and strategies which makes it difficult to prioritize diversity initiatives or hold the company accountable for progress.

What are the benefits of a diverse board?

Diverse boards bring together individuals with varied perspectives, experiences, and expertise, leading to more robust and well-rounded decision-making processes and oversight, and reducing the risk of groupthink. Different viewpoints can help identify blind spots, challenge assumptions, and generate innovative solutions. These boards are more likely to be better equipped to identify and mitigate risks by considering a wider range of potential scenarios and outcomes to better anticipate and respond effectively to emerging challenges. Boards with a more diverse composition are also likely to be better equipped to understand and address the needs of a wide range of stakeholders and this understanding can lead to more responsive and effective governance practices, as well as promoting transparency and accountability.

What can the company secretary do to ensure diversity remains high on the agenda?

The company secretary plays a pivotal role in ensuring that diversity and inclusion remains a top priority for boards. Diversity considerations should be included as a regular agenda item for the nomination committee and the company secretary can also facilitate the appointment and onboarding of diverse board members. Company secretaries should communicate diversity targets to the board through regular updates, including the efforts of peer group companies, and should ensure that diversity is a key factor in the development, implementation and oversight of applicable board policies. 

In conclusion, board diversity is not merely a compliance requirement or a box to check. By embracing diversity and inclusion, companies can enhance decision-making, governance, innovation, and ultimately, long-term performance. While significant challenges persist for the development of diverse boards, companies can drive long-term value creation and stakeholder engagement by addressing these challenges head-on and implementing proactive strategies.

About Ocorian Company Secretariat Services

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References:

Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291–309.
Catalyst. (2020). Women in S&P 500 Companies. Catalyst Quick Take.
DiliTrust. (2023). Women in the Boardroom: Breaking the Glass Ceiling.
Financial Conduct Authority. (2020). Policy Statement 22/3: Diversity and inclusion on company boards and executive management.
FTSE Women Leaders. (2024). New report shows gender balance is in sight.
McKinsey & Company. (2020). Diversity wins: How inclusion matters.
UK Government. (2023). Ethnic diversity of UK boards: the Parker Review.