Britain’s largest companies ‘need to do more’ to boost diversity on their boards, the Financial Reporting Council (FRC) has announced following the recent results of the 2020 Hampton-Alexander Review and the latest Parker Review. The regulator said it will monitor both gender and ethnic diversity progress on UK boards more closely, and also expects companies to improve on diversity reporting.

The latest research from the Hampton-Alexander Review found that one third of Board seats at FTSE 100 companies are now held by women, 10 months ahead of the December 2020 target, as reported. But progress to develop the succession pipeline across the FTSE 350 remains slow.

Although the increase of women on FTSE 100 boards is a positive step, more progress is needed to develop the succession pipeline, said the regulator. The FRC’s recent review of early adopters reporting against the Code found that far too many had limited reporting on diversity, which included how they plan to tackle the lack of women in senior leadership positions. Those companies that did report well had clear plans to meet diversity targets – beyond just gender – and understood the long-term value diversity brings.

‘UNSATISFACTORY’ APPROACH

However, the regulator described the approach to board ethnic diversity as ‘unsatisfactory’. Over half of FTSE 250 companies (52%) fail to mention ethnicity in their board diversity policy, and most of the FTSE 350 do not set measurable ethnicity targets, according to the FRC’s latest research.

Just 14% of FTSE 100 companies set measurable objectives for board ethnic diversity, while for FTSE 250 companies the figure is a meagre 2%. Even where objectives have been set, no FTSE 350 companies report progress against them. To address this failing, the FRC expects much improved reporting by companies under the new UK Corporate Governance Code which promotes diversity in appointments and succession plans, including ethnic diversity, as reported.
 

PIPELINE FOCUS

The research, undertaken by Cranfield University’s School of Management, also found that whilst 11% of FTSE 100 and 4% of FTSE 250 companies plan to increase ethnic diversity in the succession pipeline, most focus on general progression rather than specifically focusing on senior management.

The recent 2020 Parker Review on board ethnicity (as reported), showed that 150 companies out of 256 (59%) did not have at least one director of colour on their Boards, with less ethnic diversity observed on the boards of FTSE 250 companies. Around 37% of FTSE 100 companies and 69% of FTSE 250 companies do not currently meet the Parker Review target.   

The FRC’s analysis also found that 3% of the FTSE 100 and 11% of the FTSE 250 do not have a policy on board diversity. Over half of FTSE 100 companies (54) provided little elaboration in their policy beyond some acknowledgement of the value of board diversity. Only 21 FTSE 100 companies specified ethnicity in director succession planning.

POOR RECORD

“The UK’s record on boardroom ethnicity is poor. It is unacceptable that talented people are being excluded from succession and leadership simply because companies are failing to put in place appropriate policies on boardroom ethnicity, are not setting targets or are not monitoring their progress against policies,” stated Sir Jon Thompson, CEO of the FRC.
 
“A more diverse boardroom leads to better business outcomes, which is why the UK Corporate Governance Code, and now the UK Stewardship Code, requires companies and investors to promote diversity and inclusion. We will monitor closely how companies report on their policies or explain their lack of progress, in this area.”  

To improve ethnic diversity, the Parker Review recommends each FTSE 100 Board should have at least one director of colour by 2021 and by 2024 for the FTSE 250. However the ‘one by 2021’ target is unlikely to be met, as reported.

QUALITY REPORTING REQUIRED

The UK Corporate Governance Code was strengthened in 2018 to promote diversity including of gender, social and ethnic backgrounds in UK boardrooms. A separate section of the annual report should include a description of the board’s policy on diversity, including any measurable objectives it has set, and progress on achieving those objectives.

The FRC expects to see better quality commentary on all aspects of diversity in future reports. “Successful and sustainable businesses should reflect the views of shareholders and wider society, with an understanding of the value greater diversity brings at both board level and throughout the business,” added Thompson. “Given the clear benefits greater diversity brings we expect to see improved reporting going forward to meet the Hampton-Alexander targets.”