The annual reports of listed companies for financial years starting on or after 1 April 2022, the first of which will be published over the coming months, must include enhanced disclosures around diversity and inclusion. Here we summarise what we expect to be disclosed at the 2023 AGM season.

Background

In April 2022, the FCA introduced new Listing Rules requiring in-scope companies to disclose on a “comply or explain basis” whether they meet specific board diversity targets in their annual report. The FCA also made related amendments to the corporate governance rules within its disclosure guidance and transparency rules (DTRs). 

The new requirements were introduced in a bid to standardise and enhance transparency around the diversity composition of listed company boards. The FCA’s changes align with increased efforts in recent years to improve board diversity, including the Hampton-Alexander Review on gender balance in FTSE leadership and the Parker Review on ethnic diversity.¹

Which companies are in scope of the FCA's changes? 

The companies in scope of the new Listing Rules are UK and overseas issuers with equity shares, or GDRs, admitted to the premium or standard segment of the FCA’s Official List, including closed-ended investment funds and sovereign controlled companies.

The DTR changes will apply to certain UK issuers with securities admitted to UK regulated markets and certain overseas listed companies. There are existing exemptions for small and medium companies. 

What we expect to see 

Listing Rules

LR 9.8.6 R (9) and LR 14.3.33 R (1) require an in-scope company to disclose, via a statement in its financial report, whether it met the following targets on a chosen reference date within its accounting period: 

• at least 40% of individuals on its board of directors are women;
• at least one of the following senior positions on its board of directors is held by a woman: (i) the chair, (ii) the chief executive, (iii) the senior independent director, and/or (iv) the chief financial officer; and
• at least one individual on its board of directors is from a minority ethnic background.

Where a listed company fails to meet any of the targets mentioned above, it must set out which targets it has not met and the reasons, including clear and meaningful explanations, for not meeting those targets.

In-scope companies will also be required to publish standardised data on the composition of their board and most senior level of executive management by sex or gender and ethnic background.²

DTR

The scope of DTR 7.2.8A R (which requires a description of the diversity policy to be included within the corporate governance statement)³ is extended so that: 

• the company’s disclosure on its diversity policy must include the policy applied to its remuneration, audit, and nominations committees;
• the policy must cover aspects such as ethnicity, sexual orientation, disability, and socio-economic background (in addition to the previous requirements of age, gender, or educational and professional backgrounds); and
• where there is no diversity policy, an explanation in the corporate governance statement explaining why.

Practical steps

In its latest Primary Markets Bulletin (PMB 44)⁴, the FCA has set out the steps that it would expect a listed company to have considered in preparation for making the relevant comply or explain disclosures. These are:

• a review of its governance arrangements for oversight of diversity and inclusion targets and reporting, including the roles of the board, sub-committees, and senior management;
• knowing its compliance framework including both new and existing rules and regulations;
• an assessment of its existing public narrative reporting of diversity and inclusion;
• establishing or enhancing its procedures, systems and controls over data collection and reporting, including for choosing an appropriate reference date for data collected;
• where it appears the company may not meet the targets or have the relevant data: 
  • ensuring the company can provide clear and meaningful explanations (which could include possible action plans) as to why it has not met the targets or does not have the relevant data;
  • the company may wish to review the effectiveness of its existing board succession and recruitment plans; and
• identifying any legal restrictions which may prevent collection or publication of the required data. 

Monitoring compliance 

In PMB 44, the FCA also makes clear that it intends to conduct periodic reviews of the annual financial reports of in-scope companies to determine if the disclosure requirements are being met adequately. Recognising that this is the first time companies will be making these disclosures, the FCA will use these reviews to highlight areas of concern and share examples of good practice.

However, the FCA also makes clear that non-compliance will be viewed seriously and, where disclosures have not been made or a clear explanation has not been provided as to why this is the case, the FCA will request that the company publish this information via a Regulatory Information Service, in line with the rules, as soon as possible. Any non-compliance may lead to action using the full suite of powers by the FCA, as well as sanctions, where appropriate.

1. This set as its first key targets that each FTSE 100 board should have at least one director from a minority ethnic group by the end of 2021 and that each FTSE 250 board should do so by the end of 2024. Most recently, the 2023 Parker Review report has extended the targets beyond board level to include senior management. Each FTSE 350 company will be asked to set, by December 2023, a percentage target for senior management positions that will be occupied by ethnic minority executives in December 2027. ↩
2. FCA Handbook, Chapter 9 LR 9.8.6 R (9) and Chapter 14 LR 14.3.33 R (1). ↩
3. FCA Handbook, Disclosure Guidance and Transparency Rules 7.2.8A R ↩
4. Primary Markets Bulletin No 44, March 2023 ↩