Tuesday, October 18, 2011

UK Corporate Governance Code Amended to Require Annual Report on Boardroom Diversity

The UK Corporate Governance Code has been amended to require a company to report annually on its boardroom diversity policy, including gender, and on any measurable objectives the company had set for itself, and on the progress made in delivering that policy and those objectives. The new provisions on diversity will apply to financial years beginning on or after October 1, 2012. This will provide the Financial Reporting Council, which oversees the Code, with an opportunity to consult on other changes to reflect the current discussions around narrative reporting and effective company stewardship.

The FRC emphasized that its decision to defer implementing these changes to the Code should not be viewed by companies as a signal that they do not need to think seriously about diversity, and in particular gender diversity over the next twelve months. In view of the importance of diversity to the effective functioning of boards, the FRC strongly encourages all companies voluntarily to apply and report on the intended additions to the Code with immediate effect.

In May 2011 the FRC issued a consultation document seeking views on whether the Code should be revised as recommended by Lord Davies in his review of the gender diversity of the boards of UK-listed companies published in February 2011. The vast majority of respondents supported the amendments proposed, which the FRC is now in the process of implementing.

The FRC said it is not appropriate to specify a minimum target in the Code. No matter how it was qualified, reasoned the FRC, embedding a specific figure would inevitably be viewed as a quota. The FRC also noted that an absolute requirement to set a measurable objective for only one aspect of diversity is not entirely consistent with an encouragement to consider all aspects of diversity in determining the optimum composition of the board; nor would it be sensible to require companies to set a series of targets for all aspects of diversity. Rather, boards should report on what steps they are taking to achieve the diversity necessary to maximize the effectiveness of the board, and as part of that what consideration they have given to gender balance.

FRC Chairman Baroness Hogg added that the changes again prove that a comply or explain Code can deliver a flexible and rapid response and is therefore preferable to detailed legal regulation, and she urged companies to demonstrate this as quickly as possible. Her statements were in line with earlier remarks by Stephen Haddrill, Chief Executive of the Financial Reporting Council, strongly affirming the continued viability of the UK comply-or-explain corporate governance code, which gives companies flexibility to implement the Code's provisions in way that regulations would never afford

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