UK Corporate Governance Code to Strengthen Boardroom Diversity

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Sarah Jane Leake | Bloomberg Law Gender Diversity on Boards – Financial Reporting Council Feedback Statement, October 2011 The latest version of the UK Corporate Governance Code (Governance Code), which came into effect in June 2010, introduced for the first time a principle recognising the value of diversity in the boardroom. It provided that the "search for board candidates should be conducted, and appointments made, on merit, against objective criteria and with due regard to the benefits of diversity on the board, including gender."1 In his recent review of gender diversity on the boards of the UK's listed companies,2 Lord Davies of Abersoch suggested that the Governance Code should be amended to require listed companies to "establish a policy concerning boardroom diversity, including measurable objectives for implementing the policy, and disclose annually a summary of the policy and the progress made in achieving the objectives." Following a five month consultation on this issue,3 the FRC has now announced its decision to amend the Governance Code in order to strengthen its provision on boardroom diversity. This is particularly timely, coinciding with the publication of Cranfield University's School of Management's (CUSM) sixth month monitoring report on companies' progress in meeting several of Lord Davies' other recommendations.4


Although equality legislation has existed in the UK for over 40 years, statistics show that the percentage of women holding directorships has stagnated at around 12 percent in the UK (and around 15 percent in the U.S. and Canada) for many years. Since the successful introduction of quotas in Norway, that required at least 40 percent of each sex on the boards of publicly listed companies, a number of Member States have considered following suit. Reluctant to introduce a quota system in the UK, primarily on the basis that it could, ultimately, prove demeaning and undermining for female directors, Lord Davies instead developed a set of recommendations designed to help boost the number of women at the top of the corporate ladder.5 — Gender Diversity Targets In the Davies Report, FTSE 350 companies were asked to set themselves targets, by September, of the percentage of women they aim to have on their boards by 2013 and 2015, with FTSE 100 companies aiming for at least 25 percent female representation. CUSM reports, however, that only 33 FTSE 100 companies and 17 FTSE 250 companies have stated their targets, with only 4 FTSE 100 companies setting a target above the recommended 25 percent.6 While companies generally support greater female representation on boards, 14 FTSE 100 companies still "persist in retaining exclusively all-male boards." Despite these disappointing figures, though, progress is being made. Since publication of the Davies Report some eight months ago, the percentage of FTSE 100 board seats held by women has increased by almost 2 percent, to 14.2 percent. — Gender Metrics Lord Davies recommended that quoted companies should be required to disclose, on an annual basis, the proportion of women on their boards, in senior executive positions, and female employees in the organisation. Statistics reveal that only 32 percent of FTSE 100 companies have disclosed the number of women on their boards, 28 percent the number of women in senior executive positions, and 33 percent the number of female employees. These figures are low, and they are even more discouraging among FTSE 250 companies. Of the 124 companies surveyed, the figures for these companies averaged out at 22 percent, 10 percent, and 5 percent respectively. — Board Appointment Process It was further recommended that companies should disclose more detailed information concerning their appointment process, including the search and nomination process, and explain how they address diversity. CUSM is pleased to report that almost all FTSE 100 companies now include a section in their annual reports detailing the work of the nominations committee. However, only 43 percent of these companies addressed diversity, with only 20 percent specifically referring to gender diversity with regard to their appointment process. In CUSM's view, companies "need to demonstrate more explicitly their intentions with regard to addressing the issue of gender diversity as related to the board appointment process." — Gender Diversity Policy Although a sizeable number of listed companies now have a policy on boardroom diversity in place,7 few actually make specific reference to gender diversity. CUSM therefore concludes that "while some companies might have the positive intent of addressing the issue of gender diversity on their boards, they may lack a credible strategy for doing so." With the FRC's new reporting guidelines, this is a problem that listed companies will need to address – sooner, rather than later.

Changes to the Code

The amendments to the Governance Code will require the board of a listed company to:
  • Report annually on its boardroom diversity policy, including gender, and on any measurable objectives that it has set for implementing the policy, and progress made in achieving these objectives (inserting additional wording into Provision B.2.4); and
  • Consider, when evaluating its effectiveness, the diversity of the board, including gender (introducing a new Supporting Principle at B.6)
A number of stakeholders argued that the Governance Code should specify a minimum target for the number of female directors on the board. In the FRC's view, though, this would equate to a quota system and would not sit well with the UK's long-established "comply or explain" culture. Further, it would be wholly inappropriate to set a quota for gender diversity without setting a similar quota for racial diversity, social diversity, etc. The FRC could, however, find itself powerless against change in this direction if boards across the EU remain male-dominated over the next few years. While EU Commissioner Viviane Reding, is not in favour of imposing quotas, she is nonetheless "ready – if necessary and as a last resort – to consider targeted initiatives at EU level to get more women into top jobs in economic decision-making."8 These changes will be incorporated into an updated version of the Governance Code, to be published next year once the FRC has had the opportunity to consult on all further changes it plans to make.9 The new provisions will apply to financial years beginning on or after 1 October 2012. While the changes could be implemented sooner, the FRC wishes to avoid changing the Governance Code too frequently, as this is likely to cause confusion across the corporate world. Even though, strictly speaking, companies have another 11 months or so to comply with the new provisions, companies are encouraged to start applying and reporting on the diversity additions to the Code on a voluntary basis with immediate effect. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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