Finance

UK Financial Watchdog Cracks Down on Lack of Diversity in Boardrooms With ‘Comply Or Explain' Proposal

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  • The FCA proposed that at least 40% of company boards should consist of women.
  • In addition, the FCA said companies should have at least one woman holding a senior board position.
  • The regulator also proposed that at least one member of a company's board be from a non-White ethnic minority background.

LONDON — Britain's financial watchdog has proposed changing the rules for companies listed on the U.K. stock market to include a "comply or explain" requirement for not meeting diversity targets. 

The U.K.'s Financial Conduct Authority put forward its proposals on diversity and inclusion in a consultation paper published Wednesday. 

It proposed that at least 40% of company boards should consist of women, including those who self-identify as a woman. As of January 2021, women accounted for 36% of company board positions on the U.K.'s main FTSE 100, according to data from the Hampton Alexander review.  

In addition, the FCA said companies should have at least one woman holding the senior board positions of chair, CEO, senior independent director or chief financial officer. 

The FCA also proposed that at least one member of a company's board be from a non-White ethnic minority background. A report by Green Park Business Leaders, published in February, found that just 10 of the 297 people in the top three roles of FTSE 100 companies had ethnic minority backgrounds. 

The financial regulator said it wanted listed companies to publicly disclose whether they had met specific board diversity targets in their annual financial statements. If not, companies would have to explain why they had failed to meet these goals, also known as a "comply or explain" requirement.

"This allows companies flexibility to provide relevant context on their approach to board diversity, whether or not these targets are met," the FCA said in its paper. 

Along with these targets, the FCA said it wanted firms to publish data on the composition of their boards and the most senior members of executive management teams. 

Nasdaq diversity proposal

The FCA's proposals follow a push by U.S. exchange operator Nasdaq to increase diversity among the 3,000 companies listed on its stock exchange.

It filed a proposal in December asking the Securities and Exchange Commission to approve new rules on the make-up of company boards. The Nasdaq proposed requiring the majority of companies to have at least two diverse board directors: one woman and one person who identifies as either an underrepresented minority or LGBTQ. It also put forward a "comply or explain" requirement.

As of March, however, the Nasdaq's proposal had been delayed as the SEC took more time to review the plan.

Speaking in March at the launch of a charter on women in finance, FCA CEO Nikhil Rathi said that the Nasdaq had taken the lead with its listing rules and said the U.K. watchdog was exploring similar requirements.

He said: "I would encourage all capital markets participants to consider the reasons why there are so few female CEOs and CFOs or CEOs and CFOs of color presenting during IPOs or when capital is being raised — are there challenges in the culture of private equity, underwriting, equity syndication? What more can we do to sponsor and celebrate female business leaders and entrepreneurs?"

The FCA is asking for feedback on its proposals, as part of its consultation period, which closes in October. It said it would seek to make any rules formal by late 2021.

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