FRC report highlights barriers to board diversity

The FRC has published a new report on navigating barriers to senior leadership for people from minority ethnic groups in FTSE 100 and FTSE 250 companies. It gives a current snapshot of the views and experiences of business leaders and insight into the depth of ethnicity reporting and initiatives in annual reports. The aim is to identify good practice and assess its effectiveness in increasing the ethnic diversity of FTSE boards and so ensure a sustainable pipeline of talent from a range of ethnic backgrounds. We’ll consider that.

The report is based on the findings of a series of interviews with senior leaders from ethnically diverse backgrounds with actual hands on experience of what is actually happening day-to-day within firms. It suggest that, while minority ethnic executives lead successful careers and run successful businesses, they also have to adopt strategies such as ‘blending in’ and minimising their difference to get on, or ‘standing out’ to define their brand and celebrate their difference. They reported three challenges in particular: (1) being overlooked for promotion; (2) overt and covert racism; and (3) having to demonstrate higher standards compared with colleagues from majority backgrounds in order to progress or have the same development opportunities. 

Needless to say, this a very important issue for the FS sector given that one of the principles of good governance is that boards and executive teams should be diverse in their composition. Back in May, as we reported at the time, the regulator, FCA, finalised its so-called ‘comply or explain’ diversity rules for listed companies. These are the rules requiring UK listed companies to set out in their annual reports whether they have met board diversity targets. Firms will have to meet minimum for the representation of women and people from a minority ethnic background on their boards and in their senior executive teams, or explain why they have not done so.  The new rules apply to accounting periods starting on or after 1 April 2022, meaning that the new disclosures will start to appear in annual financial reports from the second quarter of 2023.

Kate Dodd and Tom Proverbs-Garbett covered this in their Outlaw article ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’. They explain how firms will  have to publish numerical data on the sex or gender identity and ethnic diversity of their board, senior board positions, and executive management in a table. It’s an approach in line with the FCA’s aim of increasing transparency, ensuring investors are able to understand and compare data and so make investment decisions based on that. 

On that data point, it’s worth saying a number of clients have asked us for help with that. That’s because the new rules mean that a company is now responsible for deciding the basis on which it compiles and categorises data. As Tom points out: ‘putting the onus on corporates may mean they need to seek advice, especially around equalities legislation and data protection issues, adding to the cost of reporting.’ 

The FCA also wants firms to report on any other practices or policies they feel contribute to improving the diversity of their boards and executive management, as well as any mitigating factors or circumstances which make achieving diversity on its board more challenging and any risks in becoming compliant in the future. On that point, Tom says: ‘This may be obvious, but its inclusion as formal guidance means that investors will be looking for this forward-looking material, requiring a level of policy or planning maturity that some companies may struggle with.’

So why might they struggle with that? Earlier, Anne Sammon joined me by video-link and I put that question to her:

Anne Sammon: “I think a lot of HR professionals within the FS sector were concerned by the diversity and inclusion discussion paper that the PRA, FCA and Bank of England published last year which suggested that they might start to gather data themselves from firms around how they were doing on different diversity characteristics and that led to a lot of discussion around well, how do we measure progress around diversity because there are nice, easy kind of simplistic ways of doing it by looking at, for example, how many women have you got in senior positions and how many women do you have across the organisation but sometimes those measures don't really give a full picture of what your firm is doing, where your starting point was, you know, whether you're in a sector where it's far more difficult to recruit women into, or whether there are other factors that might be at play and so working through how as an organisation, you're going to look at how you're measuring your progress is really important and, again, it's something that we see a lot of clients coming and wanting some advice on to make sure that they're not overstepping the mark when it comes to things like positive discrimination.”

Joe Glavina: “You say ‘positive discrimination’ – why is that a problem in this context? 

Anne Sammon: “So I think with all the focus around the FCA’s targets, for women in particular, on a board-level positions, at senior positions, there is a risk that you may find that that certain people who don't share those characteristics are going to feel that they are being disadvantaged by this and that, potentially, there is a degree of positive discrimination occurring on the basis that firms will want to show that they are making progress in those areas and, therefore, for example, female candidates might be pushed through at a faster rate than male candidates, and I think the balance here is about firms ensuring that their processes are fair, that they're looking at those kinds of systemic barriers and ways to remove them, but also the communication around this is really important. So it's making sure that that the communications that go out are sensitive to the fact that some of your employees may feel that these new measures may disadvantage them and, again, seeking external input in terms of where are the risks, where's the boundary between positive discrimination and positive action and what's lawfully allowed under the Equality Act is really important.”
That article by Kate and Tom is called ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’ and is available now for viewing from the Outlaw website – we’ve put a link to it in the transcript of this programme. We have also put a link to the FRC’s report.

LINKS
- Link to FRC report: ‘Navigating barriers to senior leadership for people from minority ethnic groups in FTSE 100 and FTSE 250 companies’
- Link to Out-Law article: ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’