FCA Diversity and Inclusion Rules for Boards and Senior Management of Listed Companies | Akin Gump Strauss Hauer & Feld LLP
[co-author: Chad Smith]
The Financial Conduct Authority (FCA) has announced that relevant issuers for financial years beginning on or after April 1, 2022 will be required to disclose information on the diversity of their boards and senior management. Affected issuers will be required to either meet a new set of diversity goals (described below) and disclose their existing board diversity measures using standardized table formats, or publish information explaining why the issuer is not complying with the new requirements.
FCAs final policy statement and the push to increase transparency for investors on diversity and inclusion (D&I) issues is part of a broader international push for D&I on corporate boards. In the United States, new NASDAQ Listing Rules on board diversity disclosures and goals, which we wrote about heretake effect August 8, 2022 and require affected companies to similarly disclose board-level diversity statistics1 on an annual basis and have at least two diversity directors.2 As with incoming FCA rules, NASDAQ disclosures are to be provided in standardized formats on a compliance or explain basis, in the hope that they provide investors with a better understanding of companies’ approaches to disclosure. D&I.3
Which issuers are subject to the new requirements?
UK and overseas issuers holding shares (or certificates representing shares) admitted to the premium or standard segment of the FCA’s official list are affected by the new requirements. The requirements also apply to closed-end investment funds and state-controlled companies, but do not apply to open-ended investment companies, “shell companies” or debt issuers. and similar listed products, securitized derivatives or miscellaneous securities.
New diversity goals
Issuers that fall within the scope of the new rules must, on a “comply or explain” basis, seek to meet the new diversity goals. Issuers must include in their annual financial report a statement indicating whether they have achieved the following objectives (the “objectives”):
- The Board of Directors is made up of at least 40% women.
- At least one of the leadership positions on the board (Chairman, Chief Executive Officer (CEO), Lead Independent Director (SID) or Chief Financial Officer (CFO)) is held by a woman.
- At least one board member is from an ethnic minority.4
If the issuer is unable to comply with the objectives, then it must explain the reasons for its non-compliance in its annual report. The FCA guidelines specify that issuers subject to disclosure requirements must also include the following background information:
- A brief summary of all key policies, procedures and processes, and any broader context that the issuer considers contributes to improving the diversity of its board of directors and senior management.
- Any mitigating factors or circumstances that make it more difficult to achieve diversity on its board (for example, the size of the board or the country where its main operations are located).
- Any risk that it foresees being able to achieve or continue to achieve board diversity goals in the next accounting period, or any plans to improve the diversity of its board of directors .
If the reporting reference date does not match the accounting reference date, the reporting issuer must explain the reason for the discrepancy. Any change affecting the issuer’s ability to achieve one or more of the objectives between the reference date and the date of approval of the annual financial report must also be mentioned.
Accompanying the forward-looking diversity targets is a new set of disclosure requirements regarding current board diversity. Along with annual narrative compliance or explanation disclosures, the FCA requires issuers to publish quantitative data on the sexual or gender identity and ethnic diversity of their boards of directors, senior positions (chairman, CEO, SID, and CFO) and senior management in standardized table formats. below :
The parameters of data collected for disclosure purposes are not prescribed but must be objectively justifiable and consistent. When the data collected is self-declared by natural persons, a description of the questions asked to obtain this data must be provided. An explanation of the data collection approach and data sources used must be submitted with disclosures.5
The FCA allows adjustments and exemptions to the above disclosures, provided they are explained in the statement, with respect to issuers whose board members or senior management are located overseas and which are subject to local laws preventing the collection or publication of the data. required for quantitative disclosure. Similarly, closed-end investment funds and state-controlled companies are exempt from disclosure requirements where disclosures are inapplicable.
Quantitative targets and disclosures are only a “first step” in establishing a new D&I regulatory framework. Following FCA common paper together with the Prudential Regulation Authority (PRA) and the Bank of England, a consultation paper is expected to be published later this year, setting out general proposals that will build on and strengthen this existing D&I legislation.
1 NASDAQ Rule 5606.
2 NASDAQ Rule 5605(f).
3 We note here that the NASDAQ diversity rule is currently the subject of a legal challenge currently pending in the US Circuit Court of Appeals for the 5th Circuit. The case is stylish Alliance for Fair Board Recruitment c. DRYno. 21-60626.
4 Defined by reference to the categories recommended by the Office for National Statistics (ONS) and excluding those listed, by the ONS, as coming from a white ethnic origin.
5 LR 9.8.6I G and LR 14.3.36G.