The new rules apply to all companies with equity securities listed in London, whether UK or non-UK incorporated, whether premium or standard listed (and including companies with equity GDRs listed in London), except for open-ended investment companies and shell companies (such as SPACs). The rules apply to closed-ended investment companies with a premium listing (subject to some potential relaxations) but not to closed-ended investment companies admitted to the Specialist Fund Segment. The rules do not apply to companies admitted to trading on AIM or which only have listed debt or other non-equity securities.
The rules are effective immediately and apply in respect of accounting periods starting on or after 1 April 2022. The FCA is also encouraging companies whose current financial year began on or following 1 January 2022 to consider complying with the new rules in relation to their current accounting period on a voluntary basis.
Board diversity targets
The new rules require, as an ongoing listing obligation, all in-scope companies to include a statement in their annual financial report setting out whether they have met specific board diversity targets on a ‘comply or explain’ basis, as at a chosen reference date within their accounting period and, if they have not met the targets, an explanation of why they have not.
The board diversity targets are:
- At least 40% of the board are women.
- At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)) is a woman.
- 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).
Companies must disclose the reference date at which the targets were assessed (and, if different from the company's previous accounting period, an explanation of why) together with any changes to the board that have occurred between the reference date and the approval date of the annual financial report that affect the company’s ability to meet one or more of the targets.
Sex or gender identity and ethnic diversity reporting
In addition to the board target diversity reporting, companies will also be required to publish numerical data (including percentages) in a standardised tabular format on the sex or gender identity and ethnic diversity of their board, senior board positions (Chair, CEO, SID and CFO) and executive management as at the same reference date.
"Executive management" means the executive committee or most senior executive or managerial body below the board (or where there is no such formal committee or body, the most senior level of managers reporting to the chief executive), including the company secretary but excluding administrative and support staff.
Separate tables will be required for reporting on gender identity or sex and on ethnic background, and must cover both the board and executive management. The table for reporting on gender identity or sex contemplates the inclusion of categories in addition to men and women and both tables will include provision for reporting individuals for whom the relevant information is not specified or who prefer to not disclose the relevant information.
The standardised format of the tables for reporting numerical data are set out in Annex 2 of the Policy Statement, as well as in the Annexes to the relevant Listing Rules (LR 9, Annex 2 and LR 14, Annex 1).
Data collection – approach and disclosure
Companies are required to determine themselves how best to collect and report the data on the sex or gender identity and ethnic diversity of individuals for the purpose of the reporting requirements (which may include self-reporting by the relevant individuals), but must explain the approach they choose to take to collecting the data (including the questions asked of individuals who self-report) and will be expected to take a consistent approach.
In contrast to the rules as proposed in July 2021 (and in light of significant feedback), the FCA has backed away from specifically stating in the final rules that men and women include persons self-identifying as such, leaving the decision instead to individual companies to whether to report on the basis of sex or gender identity.
Additional disclosure guidance
The new rules also include non-binding guidance that, in addition to complying with the mandatory disclosure requirements, a company may also decide to include the following additional disclosures in their annual financial report to provide further context:
- a brief summary of any key policies, procedures and processes, and any wider context that it considers contributes to improving the diversity of its board and executive management;
- any mitigating factors or circumstances which make achieving diversity on its board more challenging (for example, the size of the board or the country where its main operations are located); and
- any risks it foresees in being able to meet or continue to meet the board diversity targets in the next accounting period, or any plans to improve the diversity of its board.
Exceptions to the new requirements
In cases where a company has board members or executive management situated in countries in which local data protection laws prevent the collection or publication of relevant personal data, the company is not required to report the relevant information but instead must explain why it is unable to do so.
The new rules also permit closed-ended investment funds to adjust their disclosures on senior board positions and numerical data disclosures in the event that those disclosures are inapplicable, provided they set out the reasons why the disclosures are inapplicable. Generally, this should permit closed-ended investment companies which have no internal executive management to tailor their disclosures accordingly.
Diversity policy disclosures
The FCA has also updated the requirements applicable to corporate governance statements contained in directors' reports so that the description of the relevant company's diversity policy must now extend to the company's remuneration, audit and nomination committees as well as to the board itself and to cover ethnicity, sexual orientation, disability and socio-economic backgrounds, as well as the existing requirement to address age, gender and educational and professional backgrounds. Companies can choose to include numerical data on the diversity of its committees. Companies can continue to choose not to have a diversity policy and explain why they do not.
Future review
The FCA intends to review the new rules in three years’ time to consider if the relevant board targets remain appropriate, both in terms of the levels and their focus, including whether further targets for other aspects of diversity should be included.
Next steps
Companies should start considering the following:
- Whether, in the case of companies with current accounting periods starting on or after 1 January 2022 but before 1 April 2022, to comply with the new requirements on a voluntary basis for the current financial year.
- Which individuals will be in-scope for the new rules, especially in defining and identifying "executive management".
- How the company may wish to approach reporting on gender identity and sex and relevant disclosure categories.
- How relevant data will be collected and how the process and nature of the data collection process will be disclosed.
Whether the company has relevant individuals in locations with local data protection laws that need to be taken into account.
Authored by Jonathan Baird.
