Company reporting on diversity & culture ‘insufficient’, says FRC

The recent annual review of the UK’s Corporate Governance Code by the Financial Reporting Council (FRC) has revealed ‘insufficient’ and ‘limited’ reporting on diversity, and ‘minimal’ discussion about assessing/monitoring culture throughout large UK firms.

The FRC’s UK Corporate Governance Code, which sets out standards of good practice for listed companies, was updated in 2018 and came into force last year.  It “raised the bar” considerably, said FRC. But “greater focus is needed on longer term sustainability including stakeholder engagement, diversity and the importance of corporate culture”.  

UNCLEAR OBJECTIVES

The FRC said it “expected more companies to be reporting against diversity objectives,” following the publication of the FRC’s Board Diversity Reporting paper in September 2018, which explained that reporting against objectives could be improved. However, its latest report reveals that was not the case.

The FRC’s report revealed that almost all annual reports stated that the company had a diversity and inclusion (D&I) policy, and included statistics for females at board level and senior management levels. Some companies chose to include elements of the policy within the annual report, while others signposted the reader to the full policy on their website. However, it was not always clear whether there were targets related to diversity at board and senior management level, and if so, what actions were being taken to achieve these targets or wider objectives, according to the report.

This is something that FRC plans to look at more closely as ‘Provision 23’ of the 2018 Code requires companies to describe, ‘the policy on diversity and inclusion, its objectives and linkage to company strategy, how it has been implemented, and progress on achieving the objectives’.

LIMITED DIVERSITY REPORTING

That said, a few companies did explain that elements of CEO remuneration packages were linked to diversity or a KPI had been introduced to deal with diversity matters, confirmed the FRC report. Others disclosed the use of specific panels that recommended actions to improve diversity. In terms of diversity links to succession planning, a few companies reported that they only accepted gender balanced long lists from executive search companies, or only worked with companies who followed Codes of Conduct concerning ethnic and/or gender diversity. 

Overall, however, there was ‘limited’ reporting of diversity beyond gender, according to FRC. While several FTSE 100 companies did comment on ethnic diversity and included plans and targets to improve this area, only one/two reported on their approach to age, disability and/or LGBT+ diversity. The FRC said it expects to see an increase in more detailed commentary on all aspects of diversity in future disclosures. 

FOCUSED INSIGHTS REQUIRED

Commenting on the review, The FRC’s Chief Executive, Sir Jon Thompson stated: “While there are examples of high-quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change. Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.”

The FRC has called for companies to focus more on long-term sustainability by aligning purpose, strategy and culture, promoting integrity and valuing diversity.

Click here for a copy of the report.