Diversity reporting – will putting the cart before the horse deliver results?

The FCA’s consultation period has just closed for comments on their proposals around “Diversity and inclusion on company boards and executive committees”.

Once the FCA has taken on board any comments, the intention is that these updated rules will apply to all main listed companies from January 2022 (so that reporting will start from 2023).

As can be seen from some of the Articles we published earlier this year (see links below), we genuinely believe that addressing all issues of diversity is important and, doing so successfully is likely to lead to improved results for businesses.

‘NED Gender Disparity in AIM and FTSE 100 Listed Companies’

‘The Importance of Age Diversity in the Boardroom – Research in AIM and FTSE 100 Listed Companies’

However, we do think that the way that the FCA has approached this and the way its current proposals are put together raises some interesting points to consider:

• The breadth of the proposals does start straying into areas covered by the UK Corporate Governance Code, which is the responsibility of the FRC. There is a danger that conflict might start to arise if there is too much overlap.

•In our view, better diversity comes from a culture of genuine inclusion. There is therefore a potential worry that by putting more people into different boxes, you have the unintended consequence of increasing the chances of people seeing other people within the business as “different”.

•This is a very nuanced area and the proposal that reporting should be on a “comply or explain” basis does leave companies open to the danger that a) this will be seen as a tick box exercise (which would therefore have potential to undermine the credibility of those in the company put into these important roles) and/or b) where companies fail to comply for reasons which proxy agents, do not, or do not seek to, understand, the proxy agent’s response may just simply be to put a “flag” on the company.

•An increase in reporting for fully listed companies may make listing on the main market exchange seem unattractive – either compared to overseas territories or even to the AIM market. What would be of value going forward would be for a study of new listings on both AIM and the main market, to see if there are any changes of pattern or if there is any relationship between where businesses list and their overall levels of diversity.

•In our experience, the FCA and similar bodies have introduced changes AFTER receiving strong evidence that the proposed changes have a high probability of generating positive outcomes (however that may be defined). However, in the Consultation Paper (Section 3), the FCA have acknowledged that the literary data on this area is not conclusive and, therefore, part of the reason for putting together standardised reporting is that data will start to be generated that can then be used to analyse the position further.

Whilst we can see the long-term benefit of taking this approach, it does raise questions as to whether it is right for a regulator to base its proposed changes on what might be considered a “hunch” rather than getting the data first.  There is a time and money cost for every listed company in making these changes and if no benefit is shown to making them, it may diminish the standing of the regulator.

Given our longstanding interest in this area, we at MM&K will continue to review the final changes and the impact of them.  Should you have any questions regarding the diversity in your own business and what might be done to engage with the situation, please contact Stuart James.

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