Tuesday, November 11, 2014

Gender Diversity Increases on U.K. Boards in Wake of Corporate Governance Code Changes

Gender diversity has increased on the boards of directors of U.K. companies in the wake of changes to the Corporate Governance Code, which were spurred by the seminal Davies Report. A report issued by the Cranfield University School of Management found that since the Davies Report in March 2011, the percentage of female-held directorships on FTSE 100 boards has increased by 82% to 22.8% and on FTSE 250 boards by 124% to 17.5%. The percentage of appointments now going to women has varied over the three years, but in the FTSE 100 companies is now just averaging at the rate required (33%) to reach Lord Davies’ target of 25% during 2015. In order for the same target to be met by FTSE 250 companies, the pace of change still needs to increase.

The Davies Report recommended that the Financial Reporting Council (FRC), which is the custodian of the Corporate Governance Code, as well as being the regulator of accounting and auditing, should amend the Code to require companies to establish a policy on boardroom diversity, including measurable objectives and annual disclosure of their progress. Lord Davies was U.K. Minister for Trade and Investment from January 2009 until May 2010. Lord Davies noted that corporate boards perform better when they include the best people who come from a range of perspectives and backgrounds. The Davies Report found, among other things, that female directors enhance board independence.

The FRC did amend the Code to require companies to annually report on the board’s policy on boardroom diversity, including gender, on any measurable objectives that the board has set for implementing the policy, and on the progress it had made in achieving the objectives.

The Cranfield report analyzed all FTSE 100 companies’ annual reports in the wake of the Code change and found that 85% of FTSE 100 companies had stated a clear policy on boardroom diversity; 58% of companies had set measurable objectives to increase the percentage of women on their board; but only 38% of companies addressed diversity in their board evaluation process. However, 98% reported on succession planning, with 32% specifying gender.

Sir Win Bischoff, FRC Chair, noted that the report highlights that the Corporate Governance Code’s requirement for the annual report to include gender diversity policy information has encouraged companies to look at how they are managing their talent pipeline. He said that diverse boards, and by that he included not only gender diversity, but also race, background and experience, encourage better leadership and governance, contribute to better performance, engagement and innovation, and ultimately improved performance for the company and its shareholders. Companies must also pay attention to effective succession planning, which should be informed by a clear business strategy. This will ensure that boards have the right blend of skills and experience. The FRC is continuing to assess the focus on succession planning and the role of the Nominations Committee in this process. He said that the FRC plans to publish a discussion document on this topic next spring.

E.U. Directive. The report noted that E.U Directive 614 on gender balance among non-executive directors of public companies calls for a quantitative objective for gender balance on corporate boards. The Directive is currently blocked in the E.U. Council by a number of member states including the UK government. The objection is not to the principle of more equitable representation of women on boards, but on the grounds of proportionality and subsidiarity. However, the new law would give Member States the possibility of reaching the target by different means. Member States that have measures in place (legislative or otherwise) to ensure a more balanced representation in company boards would not need to change those measures, if they show that they can reach the objective of 40% non-executive directors (or 33% in the case of unitary boards such as in the UK). Those Member States could opt to maintain their existing measures instead of the procedural requirements under the proposed Directive. If in 2020 it emerges that those Member States do not manage to achieve the 40% objective, the procedural obligations under the proposed Directive would kick in.

In the E.U., some countries, such as Germany and the Netherlands, have a two-tier board structure, with an Executive Board and a Supervisory Board composed of non-executive directors.

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