The case for diversity on AIM-listed boards: The role of stakeholders – Part 3 | Fieldfisher
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The case for diversity on AIM-listed boards: The role of stakeholders – Part 3

Lily Searle


United Kingdom

There is a perception that only large institutional shareholders tend to concern themselves with diversity, and only then with gender balance.

The nature of most AIM companies means the large institutions are usually absent from their share registers – which may account for the apparent lack of stakeholder engagement (compared to that seen by Main Market companies) on the subject of board diversity.

Companies are not particularly required to report on metrics that are not obvious at face value and are generally only required to report on board composition in terms of gender representation.

But is a board with five white men and two white women, all from the same background, really more diverse than a board of seven men of different ethnicities and from backgrounds? Arguably not.

While smaller institutions do not face the same scrutiny as their larger counterparts, there are many things stakeholders can do to tackle diversity issues.

Guidance for institutional shareholders

Investment committees such as the Association of British Insurers (ABI), the Investment Association (IA), the Pensions and Lifetime Savings Association (PLSA) and Pensions Investments Research Consultants (PIRC) publish guidance and policy positions regarding the corporate governance responsibilities of institutional investors, who tend to make up the bulk of the shareholder registers of AIM companies.

The IA released a statement in February 2020 – Shareholder Priorities for 2020: Supporting Long Term Value in UK Listed Companies – in which the IA's corporate governance research service, the Institutional Voting Information Service (IVIS), stated that it will:
  • Red top any FTSE 350 company where women represent 20% or less of the board or 20% or less of the executive committee and their direct reports (and in certain other circumstances);
  • Amber top any FTSE small cap company where women represent 25% or less of the board or 25% or less of the executive committee and their direct reports (and in certain other circumstances).
IVIS will also ask a new question of all companies: has the company disclosed the percentage of its board that comes from an ethnic minority background?

In March 2020, the IA, together with the Hampton-Alexander review, announced it had written to 63 FTSE 350 companies, that either had no women or just one woman on their board, or had all-male executive committees, outlining concerns about the lack of gender diversity and asking them to set out the action they are taking on this issue.

The UK Corporate Governance Code (UKCGC) contains a requirement that companies applying this code should "promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders" and include a statement in their annual financial reports indicating how they apply the principles of the UKCGC and whether they have complied with its provisions.

Principle J of the UKCGC states that "appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths".

However, the UKCGC is applicable to Main Market-listed companies with a premium listing and much of the engagement by investment committees and lobbying groups has focused on the FTSE index, rather than AIM, when the issue of board composition is much starker on AIM.

Although companies towards the upper end of AIM are encouraged to consider applying the UKCGC, the vast majority choose to follow the Quoted Company Alliance Corporate Governance Code (QCA Code).

AIM-listed companies should explain, in a corporate governance statement, how the QCA has been implemented and include an explanation of any of any deviations. The QCA follows 10 main principles, the most diversity-relevant of which are:
  • Maintain the board as a well-functioning, balanced team led by the chair;
  • Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities;
  • Promote a corporate culture that is based on sound ethical values and behaviours.
In relation to the second point, the QCA recommends that "the Board should understand and challenge its own diversity, including gender balance, as part of its composition."

On a selection of corporate governance statements I reviewed, many companies did not mention gender (or other diversity characteristics) in their evidence of applying this principle, instead choosing to report on their diverse skillset of the board.

So does the QCA Code need to be more specific?

Referring to the Company Matters (part of the LINK Group) Report, Board diversity in AIM and FTSE Small Cap companies, it is clear that many AIM companies have not committed to specific reporting on this matter.

The report states that despite greater expectations for companies to report accurately and transparently on –

• Their board diversity policies;
• How they are meeting targets (if at all); and
• How their nomination committees account for diversity in appointments.

– this has proven to be a weak area of reporting, with 42% of the top 50 AIM companies making no mention of any kind of policy on diversity on their website or in their Annual Report.

The Company Matters report also noted that companies often have inconsistent statements about board diversity spread across three or more sections of their annual report, making it difficult to identify their position on diversity or how they demonstrate accountability for change.

Most concerning, the report notes that gender diversity on the boards of the AIM UK 50 companies is only slightly higher than the FTSE 350 was a decade ago, with 15% women directors (of a total of 329 directors). Over a third (36%) still have all-male boards.

So what next?

Clearly, progress is being made, but not fast or far enough.

I would encourage all stakeholders to be active and engaged with the boards of AIM-listed companies.

Demand more disclosure and challenge boards to explain and apply diversity policies. If this fails, vote with your feet.

All have a part to play on the issue of diversity, and companies will be better for it.

This article was authored by Lily Searle, corporate associate at Fieldfisher and is the third of a three-part series on diversity on AIM-listed company boards. Read Part 1 and Part 2.

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