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FRC: FTSE 350 must do better on diversity reporting

The UK's largest listed companies have been urged to go beyond "tick box compliance" when it comes to workforce diversity, before more demanding reporting requirements come into force next year.19 Sep 2018

Although 98% of FTSE 100-listed companies and 88% of FTSE 250-listed companies have a policy on board diversity, just 15% of FTSE 100-listed companies are currently fully compliant with the reporting requirements set out in the current UK Corporate Governance Code (the Code), according to research conducted on behalf of the Financial Reporting Council (FRC) (34-page / 1.03MB PDF). Full compliance with the Code requires companies to describe their policies on diversity, their process for board appointments, their objectives for implementing the policy, and progress on achieving those objectives.

The revised UK Corporate Governance Code comes into force on 1 January 2019, for company accounting periods beginning on or after that date. The revised Code, which like its predecessor will apply on a 'comply or explain' basis, contains a renewed emphasis on succession planning and clearer diversity reporting requirements. Companies will also be expected to ensure that their appointment and succession planning practices promote diversity more broadly, and to think beyond gender diversity.

FRC executive director Tracy Vegro said that some of the results of the research were "disappointing". She said that the FRC planned to write to listed companies to "challenge them to take a more strategic approach to diversity and inclusion, and to consider their approach to reporting on it".

"There is almost universal acceptance that diversity contributes to more effective decision-making and mitigates the danger of 'group think'," she said.

"We expected to see more of our largest companies providing greater information about their approach to boardroom diversity and insights on the actions they are taking to increase diversity at all levels, particularly those in the current UK Corporate Governance Code. To maintain a competitive edge and success over the long-term, UK companies need to consider how diversity and inclusion is relevant to the markets in which they operate, all their stakeholders and the communities they serve," she said.

"The research suggests that although considerable progress has been made in increasing the diversity of UK boards since 2011, momentum has tailed off and efforts to increase female representation at the top of companies has stalled," said corporate governance expert Tom Garbett of Pinsent Masons, the law firm behind Out-Law.com. "With a new UK Corporate Governance Code ready for accounting periods beginning in 2019, a major pillar of which is reporting on diversity, many boards will need to give concentrated thought throughout 2019 to diversity in its different forms - and encourage their nomination committees to lead the way."

"The report estimates that only between 20 and 30% of the FTSE 100 and 10% of the FTSE 250 demonstrate 'best in class' reporting, a mature approach to gender diversity and a committed attempt to considering how best to increase ethnic diversity. This suggests that meeting the expectations of the Code will require practical focus from most companies who, the FRC hopes, will develop, and report, a multi-dimensional approach to the issue," he said.

The research was conducted by the business school at the University of Exeter, and based on published corporate reports as at 1 March 2018. The report also incorporated examples of "quality" diversity reporting by listed companies.

In 2017, female executives accounted for 27.7% of FTSE 100 board members, up from 12.5% in 2010, before Lord Davies' 2011 report into gender balance on FTSE 100 boards. By 2017, this figure had reached 29%, which the FRC said demonstrated "continued progress" towards a 33% by 2020 target set by the follow-up Hampton-Alexander review of November 2016. However, progress on increasing the number of women in FTSE 100 executive management has been slower, with women accounting for 19% of FTSE 100 executive team members in 2017, up from 12% in 2011.

"Interestingly, improving executive diversity below board level has been addressed less by the UK Corporate Governance Code than improving diversity on the board itself," said corporate governance expert Graeme Standen of Pinsent Masons. "It is addressed, however, by the Women in Finance charter."

"The research flags that signing up to the Women in Finance charter seems to have had a positive effect on the quality of a FTSE company's diversity reporting. Firms in the sector often have relatively high gender pay gaps, but perhaps this has acted as a spur to reform. This sector also includes the institutional investors who have both the power and the motivation, in terms of potentially enhanced investment returns, to drive the senior and workforce diversity agendas across all sectors to improve business performance. The 2008 financial crisis may also have played a role, as the internationally agreed policy responses and the related UK and EU legislation focused on improving corporate governance standards, amongst other things, and include express acknowledgements of the importance of board diversity in challenging risky 'group think'," he said.

The revisions to the UK Corporate Governance Code were made against a backdrop of government-driven corporate governance reforms during 2018. These also included changes to directors' remuneration reporting for UK FTSE companies and other types of UK quoted company.

"The main reform to directors' remuneration reporting will be the introduction of mandatory annual disclosure of the pay ratios between the CEO's total remuneration and the 25th percentile, median and 75th percentile of UK employee total pay, with an accompanying narrative and explanation," said Standen.

"In the context of gender and diversity issues in FTSE workplaces, it should be noted that these new pay ratios have the potential to interact strongly with the gender pay gap reports published by individual employers in the same FTSE-listed group, and also with any voluntary consolidated gender pay gap report presented in the relevant group report and accounts," said Standen. "This is because gender pay gap reporting also relates to median and interquartile pay in the workforce of the particular employer, but on a markedly different basis.

"Although the relevant group remuneration report and individual group employer gender pay gap reports are likely to give a somewhat inaccurate impression of the true relationship between group pay ratios and the possibly unreported consolidated group gender pay gaps for the financial year, reading them together will almost certainly suggest that the CEO:employee pay ratios would look considerably 'worse' for female UK employees alone than for male UK employees alone," he said.