The FCA's Consultation on Diversity: Key considerations for listed companies | Fieldfisher
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The FCA's Consultation on Diversity: Key considerations for listed companies

Lily Searle


United Kingdom

In July 2021, the UK's Financial Conduct Authority launched a consultation on proposals to boost disclosure of diversity on listed company boards and executive committees as part of wider reforms to the UK Listing Rules. As a leading legal adviser to AIM-listed companies, Fieldfisher sought feedback from clients, contacts and colleagues and submitted a response. Below is a summary of our recommendations.

Setting gender and diversity targets for boards

The FCA is pushing for greater transparency regarding the diversity of listed company (issuer) boards and has proposed setting targets for issuers to meet on a 'comply or explain' basis.

Targets for gender representation are broadly welcome; in particular, the target for executive board members is of real importance, although this may be different to targets at other levels of the business to reflect the composition of issuer.

To ensure diversity in key decision-making roles, targets for executive board members may be best confined to the CEO, Executive Chair, CFO and COO positions. There is arguably less to be gained from imposing targets that include Senior Independent Directors (SID) and Non-Executive Chairs, as these roles are not core to the day-to-day management of the company.

In addition, the 40% target proposed by the FCA for female board positions could be seen as arbitrary, when a 50/50 gender split on a 'comply or explain' basis reflects the general population.

Definitions and categories of ethnicity would also benefit from careful consideration, as Office for National Statics (ONS) definitions are insufficiently granular to paint an accurate picture of ethnic diversity.

The FCA might also wish consider alternative targets around ethnicity, such as a 20% ethnically diverse board or 50% diverse candidates overall (to include a minimum of one woman).

The use of a 'comply or explain' disclosure policy for board diversity should be an effective method of ensuring progress and should pave the path of least resistance for issuers.

However, questions remain about how the FCA will monitor the quality of reporting and whether there will be any meaningful consequences for poor quality reporting.

It should also be remembered that targets are an end, rather than a means, and there should be particular focus on implementing effective policies and procedures to enhance and encourage inclusivity and diversity at listed companies. If this is done well, diverse boards and management will necessarily follow.

For example, shadow boards can be particularly effective in mentoring internal candidates and providing board experience for non-traditional candidates.

A board may be able to show that it has an effective (albeit not necessarily diverse) board but has put in place measures to diversify and develop the company's talent pipeline with succession planning for future board composition in mind.

It is hoped that the FCA's proposals, if implemented, will spur long-term diversity planning by companies.

Reporting numerical data on gender and ethnic diversity

In tandem with its proposal to set targets for board diversity, the FCA has suggested that issuer companies should submit numerical data on gender and ethnic diversity on their boards and senior management teams.

Broadly speaking, while some may feel it is a blunt instrument, numerical data is helpful when comparing the diversity of issuers.

Reporting on the composition of senior management would be particularly beneficial, as stakeholders do not have as much transparency here as they do with company boards; profiles of directors and the composition of governance committees are generally disclosed in the 'investor' sections of issuers' websites and within issuers' annual reports.

While there are some emerging aspects of gender identity that will need to be considered, in general, gender reporting should not create a significant additional burden on issuers.

There may be some additional administrative burden for ethnicity reporting, particularly given the need for greater granularity of ethnicity categories outlined above, however in most cases this should be minimal.

Ideally, numerical data reporting should distinguish financial controllers or positions that are most likely to lead to executive board positions, for example, COO, CTO, FD, and MD. This also goes to the succession planning of the issuer and covers the management composition of the issuer, which is less visible to investors.

An alternative to looking at senior management is to look at all employees above a certain salary threshold or the top 20% of earners at a particular organisation.

Reporting other special category data

The FCA asked consultation respondents to consider whether it would be beneficial to expand its diversity data collection beyond gender and ethnicity to record other types of special personal data.

In general, many individuals will not want to provide data on sexual orientation and for privacy reasons and we recommend this is not gathered on a compulsory basis.

This may be particularly pertinent in respect of sexual orientation reporting for overseas issuers, whose home countries may not have sufficient legal protections for LGBTQ+ persons. Sexual orientation is also a special category of data that individuals may not want to disclose.

However, reporting on a voluntary and anonymous basis for disability and sexual orientation data may help improve diversity transparency, while recognising that some individuals may still feel there is stigma attached to disclosing such data.

Obligations for overseas and smaller issuers

The FCA has proposed to apply any new rules on diversity reporting to UK and overseas issuers with equity shares, or certificates representing equity shares, admitted to the premium or standard segment of the FCA’s Official List.

Open-ended investment companies and 'shell companies' will likely be excluded.

While this scope seems generally appropriate in view of the FCA's objectives, different measures appropriate to overseas categories of race and ethnicity (or similar regimes) should be considered.

Ideally, ethnicity targets and reporting should be measured against the demography of the issuer, however this may be challenging to introduce and maintain.

Nevertheless, it may be hoped that the FCA will bear in mind that some companies are dual-listed and may be attempting to comply with multiple regimes simultaneously. In theory, this should be accommodated by the 'comply or explain' basis of the reporting requirements.

Overseas issuers will however need to give some thought to the basis on which they collect data on race and ethnicity in particular.

Such data collection will need to be compliant with local privacy and labour laws and, in certain jurisdictions, it may be considered unusual to gather this category of data for cultural or historical reasons. This will also be a consideration for UK issuers with non-UK-resident board members.

Implementation timing

The FCA has proposed that its new Listing Rule requirements will apply to accounting periods starting on or after 1 January 2022, so that reporting will start to be seen in annual financial reports published for that year in spring 2023.

However, the FCA has said it plans to give issuers flexibility in the timeframe they use for their diversity reporting, for example, in setting the reference date when the data is captured within the accounting period covered in the annual financial report.

Although it would be desirable to see results sooner, the proposed implementation period gives sufficient time for issuers to carry out an effective recruitment campaign, should this be needed, and to draw up policies for improving and maintaining inclusiveness and diversity.

The FCA has further proposed a phased approach to improve its use of data over time. This is a welcome suggestion, as it should allow the FCA to analyse and understand the responses gathered and use this data to inform (and revise, where necessary) targets accordingly.

Once three-to-five years' worth of data has been received, it may be hoped that some useful findings will be made to inform more detailed data capture in later iterations of this policy – to potentially include: a more granular look at ethnicity; data around internal promotion versus lateral hires; recruitment mandates; and flexible working policies.

This article was authored by Lily Searle, a senior corporate associate at Fieldfisher. In putting the article together, Fieldfisher canvassed the views of its internal Inclusiveness and Diversity Groups; lawyers interacting with listed clients; and a number of Fieldfisher's listed clients. For a copy of Fieldfisher's response to the FCA Consultation in full, please see: Fieldfisher LLP: Response to FCA Consultation on Diversity. For a copy of FCA Consultation, see: Diversity and inclusion on company boards and executive committees.

Areas of Expertise

Equity Capital Markets

Related Work Areas

Financial Services