How to comply with the FCA's new diversity and inclusion targets for listed companies

05 May 2022. Published by Connor Cahalane, Partner, Head of Public Companies and Karen Hendy, Partner, Head of Corporate

The FCA has finalised its new rules on diversity and inclusion on listed company boards and executive committees. The rules, which are set out in the FCA's policy paper PS22/3: Diversity and inclusion on company boards and executive management, are substantially in line with the proposals set out in the FCA's consultation paper CP 21/24. In scope listed companies are required to include a statement in their annual financial report on whether they have met specific board diversity targets on a ‘comply or explain’ basis, as at a chosen reference date within their accounting period.

1. Which companies do the disclosure requirements apply to?

The new rules apply to all UK and overseas companies with shares listed on the premium or standard segment of the FCA's Official List. AIM companies are outside the scope of the new rules.

2. When do the new targets apply?

The new rules apply to annual financial reports for periods starting on or after 1 April 2022, meaning listed companies will need to include the disclosures in annual financial reports from Q2 2023.

The FCA encourages listed companies with financial years beginning on or after 1 January 2022 to consider complying with the new requirements in relation to their current accounting period on a voluntary basis, with the expectation that the enhanced transparency will be positively received by investors.

3. What disclosures do companies need to make under the rules?

Listed companies need to include in their annual financial reports:

  • a 'comply or explain' statement on whether they meet the FCA's targets (see below) for gender and ethnic minority representation on the board of directors;
  • any changes to the board that have materially affected the company’s ability to meet one or more of the targets;
  • details (numbers and percentages) on the gender and ethnic diversity of individuals on the board, senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)), and the executive management team; and
  • as part of the corporate governance statement, a description of how the company's diversity policies apply to the remuneration, audit and nominations committees of the board (as well as to the board itself).

The FCA's targets are:

  • At least 40% of the board are women;
  • At least one of the senior board positions (Chair, CEO, SID or CFO) is held by a woman; and
  • At least one member of the board is from a minority ethnic background (which is defined by reference to categories recommended by the Office for National Statistics (ONS)) excluding those listed, by the ONS, as coming from a White ethnic background).

4. What other information do listed companies need to disclose?

Listed companies must include in their annual financial report the reference date used for the purpose of compiling the data disclosed. Where this is different from the reference date used in the previous accounting period, the company must include an explanation of why. The company must also disclose any changes to the board between the reference date and the date on which the annual financial report is approved that have affected the company’s ability to meet one or more of the targets.

In scope companies are also required to disclose numerical data on the sex or gender identity and ethnic diversity of the board, senior board positions (Chair, CEO, SID and CFO) and executive management. This information must be set out in a standardised table format as at the selected reference date.

5. What are the consequences of failure to meet the targets?

As with other 'comply or explain' requirements, failure to meet the targets does not constitute a breach of the Listing Rules, though each company will be required to disclose this fact and the reasons for not meeting the target.

6. What diversity data needs to be disclosed?

Companies must include in their annual financial report a table of information setting out each of the following by reference to sex/gender and ethnicity representation:

  • the number of board members;
  • the percentage of the board;
  • the number of senior positions of the board (CEO, CFO, SID and Chair);
  • the number in executive management; and
  • the percentage of executive management.

This information must be set out in a table in a prescribed format as detailed in Chapter 9 of the Listing Rules at LR 9 Annex 2.

Following consultation on the proposed rules, the FCA has added a new limb to the disclosure which requires transparency on the issuer’s approach to collecting the data. The FCA explains that the amended approach aims to provide flexibility for companies whilst still achieving the policy objective to provide investors with a greater overview of composition of the board and executive management team. Additional flexibility is also provided within the data reporting tables to allow companies to add to the fields of 'men' and 'women' to reflect how the data was collected, for example to include reporting on a non-binary gender basis.

7. Where can the rules be found?

The new disclosure requirements for companies listed on the premium segment are set out in Chapter 9 of the Listing Rules at LR 9.8.6(9). For companies listed on the standard segment, the disclosure requirements are set out in Chapter 14 at LR 14.3.33.

The updated requirements in relation to the corporate governance statement are set out in Chapter 7 of the Disclosure Guidance and Transparency Rules at DTR 7.2.8.

8. Why has the FCA introduced the new rules?

The FCA hopes that the new rules will encourage greater diversity on listed company boards and management teams through investor pressure, which in turn may lead to further benefits for company's decision-making processes and corporate governance.

The targets have been set on a 'comply or explain' basis to serve as a positive reporting benchmark for companies and to encourage scrutiny by investors, as well as increased consideration of diversity and inclusion throughout businesses.

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