FCA considering diversity quotas for boards

Listed companies could face mandatory diversity quotas under measures being considered by the FCA. In a speech given last month to the Women in Finance Charter Annual Review FCA’s CEO, Nikhil Rathi, explained why diversity and inclusion are regulatory issues and how the FCA wants firms to do more. Personnel Today reports how Rathi is weighing up whether to require firms to meet a board diversity quota or face regulatory scrutiny, much like companies on the US Nasdaq – they’re required to have at least two non-white or female board directors or explain why not. Rathi says finance firms had not done enough to improve gender and racial diversity at senior levels and the FCA would consider how best to use its powers in the years ahead. He went on to talk about the need for a culture change. He said: “As part of our work on wholesale banking culture, we introduced five conduct questions to help focus minds of senior managers on conduct risk,” Rathi said. “I would like to see this expanded – and a sixth added – for all firms: is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?”

So, let’s get some reaction to that. Ben Brown advises a number of clients in the sector. He joined me by video link from Leeds to discuss the issue. I started by asking if diversity quotas would be a big deal for firms:

Ben Brown: “I think it would be a very big deal. It's certainly an escalation of the language and the proposals coming out of the FCA regarding diversity and inclusion. Diversity and inclusion has been on the FCA’s agenda for years now and we've seen a number of speeches by various senior executives at the FCA regarding the matter and they have been increasing in the seriousness of tone with which that they're mentioning the subject and I think this is just the latest from the CEO, the most senior person within the organisation effectively threatening to impose targets on businesses that want to do business in the UK and that’s why it's been so widely publicised because it is a significant move to say that if you want to list your business on the FTSE in the UK, we're going to impose on you targets related to how diverse your board is. It’s not without precedent of course, they do this in the US already if you want to list on the NASDAQ, but in the UK there isn't something like this. The FCA has made it very clear that boards have a requirement to focus on diversity in boards but actually there are no set targets at the moment, it's very much at the firm's discretion. However, the FCA has made very clear here that that discretion might be taken away and it might be put into the FCA’s hands. So, I think it is a pretty significant move.”

Joe Glavina: “Rathi talks about the supervisory tools the FCA can draw on to force change and he mentions the possible vetting of senior managers at the application stage. What do you make of that?

Ben Brown: “I think that element of the speech is probably potentially more important, certainly in the short term, than the suggestion about having diversity quotas for listings in the long term because there's no set deadlines for this but actually what the FCA can do, and is within its power to do already when it comes to looking at senior manager applications under the existing senior manager and certification regime, is actually looking at the applications that are coming through from firms and judge applications for senior managers based on a firm's record of diversity and inclusion. It can look into the firm itself and determine whether an application from, for example, another white male who might sit on the board, or it's proposed to sit on the board of a firm as a senior manager, actually whether that is the right thing to do, not only because let's say that the firm has targets on diversity and inclusion, publicised targets that it hasn't met, the FCA could look at that, and use that as a reason to reject a senior manager application on the grounds that this firm has a set target to diversify the board and their management and this further application is an example of them not doing that. So I think that potentially is the most serious issue for firms to consider because if they are not meeting their own targets, if they're not doing enough to facilitate an increased diversity on their own boards, then potentially the FCA can use existing powers to step in and say you can't continue like this. So, I think it's very much something that firms need to be alive to. It’s not enough to set a target and to have reasons why it's not met. That's the minimum, you know, really if firms are going to be making applications, potentially they need to start describing why this is the right appointment in the context of diversity and inclusion.”

Joe Glavina: “Given that this is the finance sector you think firms would take a lot of notice of the numbers and in his speech Rathi refers to the evidence which clearly shows   - a strong business case for diversity and inclusion - lower fines and higher returns. So why do you think firms don’t take more notice?

Ben Brown: “Personally, I don't think, and my experience with my own clients, it's certainly not the case that firms aren't taking notice of the issue and it’s certainly not the case that they are not thinking very seriously and strategically about equality and diversity. It’s very high on clients’ and firms’ agendas and it has been for a while. The speech recognises, I think, some of the reasons why, over the last 12 months, of course there have been potential difficulties in recruitment and retaining talent and promoting talent and issues with firms promoting in general, but I think more and more firms need to be focused on what they can do to meet their own targets. So, I think one of the potential reasons is well, firms say we set increased targets, or stretch targets, and that's why we haven't met them, but I don’t think that's enough anymore. Targets need to be realistic and I think, to not meet them, especially in light of the fact that, as you've suggested, the evidence shows firms with a more diverse board are more likely to succeed, financially speaking, reputationally speaking, strategically speaking. I think it's just more important than ever that they meet their own targets and actually go back and look at what they're doing to achieve those targets and I think that's, that's really important. A related point, I think, is a focus on whistleblowing. Again, that's not necessarily something that was specifically mentioned, but  it was implied, and it was implied in respect of people within a firm being encouraged to speak up and it’s suggested that it's less likely for them to speak up if that firm doesn't have a diverse board because people don't feel empowered to do so when, for example, it's a board of all white males. It's suggested that actually firms are more prone to risk firstly, and most importantly, but secondly, less likely to focus on problems because people don't speak up in those circumstances and I think that is a really important point for firms to take away.”

That speech by the FCA’s CEO, Nikhil Rathi, was delivered at the launch of the HM Treasury Women in Finance Charter Annual Review last month. You can read it in full – we have put a link in the transcript of this programme.

LINKS
- Link to speech by Nikhil Rathi