New diversity provisions for the UK Corporate Governance Code
"This article was first published in New Corporate Publications website article – November 2011."
New provisions are to be added to the UK Corporate Governance Code (“Code”) from 1 October 2012 relating to boardroom diversity.
The Financial Reporting Council (“FRC”) consulted earlier in the year on Lord Davies’ recommendation to amend the Code in relation to diversity, and has now published its conclusions.
Section B.2 of the Code deals with appointments to the board and provision B.2.4 currently states that “A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments”. Following this will be inserted: “This section should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives.”
The FRC decided to refer to “measurable objectives” in order to deter bland, generic disclosures. However, the inclusion of the preceding word “any” means that companies will not be obliged to set measurable objectives (or else explain why they have not done so). The FRC also declined to specify any minimum target for the percentage of female directors on the board as this would inevitably be viewed as a quota.
A new supporting principle will be added to Section B.6 (which relates to the evaluation of board effectiveness) stating: “Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness.”
The FRC was not persuaded that it would be useful to set out in the Code, or in supplementary guidance, some of the elements that might be covered by a policy on boardroom diversity, but will keep this under review.
The changes are to be implemented for financial years beginning on or after 1 October 2012. This date was chosen on the basis that the Code was last amended in June 2010 and overly frequent revisions are unhelpful. Also, separate government consultations on narrative reporting may lead to further Code changes from October 2012 and it was desirable to combine these amendments. Nevertheless, the FRC strongly urges companies subject to the Code to implement the new provisions voluntarily as soon as possible.
For further details, see the FRC’s “Feedback Statement: Gender Diversity on Boards” here.
Article by Daniel Hooke, Senior Associate (PSL) at Fieldfisher.