The Parker Review has published its 2021 update on ethnic diversity on FTSE 100 boards, along with the results of its latest survey. The update notes that, whilst change remains slow in the key functional roles, significant progress has been made despite disruptions to board recruitment processes due to Covid-19.
The government commissioned the Parker Review in 2015, with a view to increasing the ethnic and cultural diversity on UK company boards. In 2017, Sir John Parker recommended that each FTSE 100 board should have at least one director of colour by 2021, each FTSE 250 board should have one by 2024 and that companies should develop internal mechanisms to promote diversity (see our corporate update 2017/21).
The key findings of the 2021 update report are:
- 74 FTSE 100 companies had ethnic representation on their boards as at 2 November 2020 (the cut-off date for the survey), compared to 52 in January 2020 (and by March 2021, a further seven FTSE 100 companies confirmed that they had appointed a director from a minority ethnic group);
- 21 FTSE 100 companies who completed the survey had no ethnic representation on their boards as at November 2020 (three further companies did not submit responses and two were unable to provide the information);
- 124 out of 998 board positions in the companies that responded are held by 118 ethnic minority directors (12%), compared to 95 directors in 2020 (8%); and
- only five ethnic minority directors occupy a CEO position, with two individuals in Chair roles and four in CFO roles.
The Hampton-Alexander Review has published its five year summary report on improving gender balance in FTSE companies.
The Hampton-Alexander Review was established in 2016 to hold FTSE 350 companies to account for the lack of representation of women in leadership positions, and set a target of having 33% of all board and senior leadership positions held by women by the end of 2020 (see our corporate update 2017/23).
The five year summary report shows that:
- the number of women on FTSE 350 boards has risen from 682 in 2016, to 1026 in 2020;
- the target of women holding 33% of board positions overall has been met by FTSE 350 companies. As at 11 January 2021, women held 36.2% of all FTSE 100 board positions and 33.2% of all FTSE 250 board positions, but 171 companies in the FTSE 350 have not yet achieved the 33% target; and
- the FTSE 100 has 30.6% women in executive committee and direct report roles, with the figure for the FTSE 350 being 28.5%.
This is the fifth and final year of the Hampton-Alexander Review and it is not clear whether the government will commission a further review. However, the report identifies a number of recommendations for the future, including that companies should have a woman in at least one of the four roles of Chair, CEO, senior independent director (SID) and CFO, and that companies should publish a gender pay gap for their board and executive committee.
The Investment Association (IA) has published a document discussing its listed company shareholder priorities for 2021.
The IA first published its shareholder priorities in January 2020. It focused on four key areas: climate change, audit quality, stakeholder engagement and employee voice and diversity (see our earlier blog post). The 2021 priorities document provides insights into the progress made by companies on these issues in 2020 and investors’ expectations for 2021. It also sets out how the Institutional Voting Information Service (IVIS), which is part of the IA, will analyse these issues for companies with year-ends on or after 31 December 2020.
- Climate change – All companies in a high-risk sector (being financials, energy, transportation, materials and buildings, and agriculture, food and forest products) that do not address all four pillars of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) (being governance, risk management, strategy, and metrics and targets) will receive an amber top from IVIS. IVIS will also highlight to investors those FTSE companies that include a statement in their annual report that the directors have considered the relevance of material climate-related matters when preparing and signing off the company’s accounts.
- Audit quality – The IA says that the quality and robustness of the audit is essential for investors but notes that, in practice, audit committee reports do not adequately demonstrate how the audit committee has challenged management’s judgments and do not describe how the audit committee has assessed the quality of the audit. IVIS will continue to focus on these issues in 2021.
- Stakeholder engagement and employee voice – The IA notes that the Covid-19 pandemic has significantly impacted companies and their stakeholders. It says that investors expect companies to make quality disclosures outlining the approach taken to engaging, communicating and supporting the company’s stakeholders during the disruption caused by the pandemic and that this should include how the board reflected the views of their stakeholders in key decision making.
- Diversity – IVIS will issue an amber top to any FTSE 350 companies that do not disclose either the ethnic diversity of their board or a credible action plan to achieve the Parker Review targets (see our earlier blog post). IVIS will also issue a red top to any FTSE 350 company that has female representation of 30% or less on their board, or female representation of 25% or less in their Executive Committee and its direct reports. FTSE Small Cap companies will receive an amber top in those circumstances.
Institutional Shareholder Services (ISS) has published its UK Proxy Voting Guidelines for 2021 and Glass Lewis has published its 2021 Proxy Paper Guidelines.
ISS Proxy Voting Guidelines
The key changes to the current UK proxy voting guidelines are set out in a policy updates document and include:
- Board gender diversity – ISS will generally recommend voting against the chair of the nomination committee, or other directors on a case by case basis, if the board of a FTSE 350 company (excluding investment trusts) does not comprise at least 33% women, in line with the Hampton-Alexander Review recommendations (see our corporate update 2019/22). For 2021 only, a public commitment to comply with the Hampton-Alexander recommendations by the company’s 2022 AGM will not result in a vote against recommendation. A similar ‘vote against’ recommendation will generally be applied to AIM companies with a market capitalisation of over £500 million and FTSE Small Cap companies if there is not least one woman on the board.
- Overboarding – The guidelines have been amended to reflect ISS’s current practice that it may take a more lenient view when applying its director overboarding criteria if a director serves on the board of a less complex company.
The 2021 proxy voting guidelines apply to shareholder meetings taking place on or after 1 February 2021.
Glass Lewis Guidelines
The key changes to the Glass Lewis Guidelines this year include:
- Board diversity – Glass Lewis will generally recommend voting against the chair of the nomination committee of any FTSE 350 company that has failed to meet the 33% board gender diversity recommendation in the Hampton-Alexander Review. A similar ‘vote against’ recommendation will be applied to any other company listed on the Main Market of the London Stock Exchange if there is not least one woman on the board. The guidelines have also been updated to reflect Glass Lewis’s expectation that FTSE 350 companies provide meaningful disclosure against the board ethnic diversity targets set out in the Parker Review (see our corporate update 2020/3).
- Hybrid and virtual shareholder meetings – The guidelines discuss Glass Lewis’s approach to amendments to articles of association to permit virtual meetings or hybrid meetings and the confirmations that it expects from companies in order to support such amendments. The guidelines also set out Glass Lewis’s expectations when companies are convening shareholder meetings at which attendance in person is limited (for example, meetings held under the Corporate Insolvency and Governance Act relaxations discussed at item 1 above).
- Directors’ remuneration – The guidelines clarify Glass Lewis’s expectation that remuneration committees should retain a level of discretion to ensure that remuneration outcomes for executive directors align with company performance, as well as shareholder and employee experiences.
- Environmental and social issues – From 2021, Glass Lewis will note as a concern when boards of FTSE 100 companies do not provide clear disclosure concerning the board-level oversight afforded to environmental and social issues. There is also discussion on how Glass Lewis approaches its assessment of resolutions proposed by shareholders on environmental and social issues.
- Human capital – The guidelines include a new section on human capital management and diversity.
The Financial Conduct Authority (FCA) has published Primary Market Bulletin 31 (PMB 31), and through it publicised two recent reviews it has undertaken into delayed disclosure of inside information and corporate governance disclosures by listed issuers.
Delayed disclosure of inside information
The FCA has reviewed the delayed disclosure of inside information notifications (DDIINs) it has received. Under Article 17(4) of Market Abuse Regulation (MAR), where a UK issuer delays disclosure of inside information, once it announces that information it must notify the FCA that it has been delaying its disclosure.
The FCA notes that only one quarter of issuers have submitted a DDIIN at all, leaving it concerned that issuers may not be aware of the requirement to submit them. It also identifies a number of areas where it will increase its oversight, including:
- Unscheduled financial information – The FCA was surprised that the delays associated with disclosing unscheduled financial information were longer than those relating to periodic financial information, as it is more challenging to establish circumstances in which it is legitimate to delay unscheduled financial information. It also notes that it has only received a low number of DDIINs in this area, when compared with the number of unscheduled trading statements issued.
- Director/board changes – The FCA was also surprised at the number of DDINs it received in relation to director/board changes, given that it is not specified in the (non-exhaustive) situations in the European Securities and Markets Authority (ESMA) guidelines on legitimate interests for delay where an issuer may have a legitimate interest in delaying disclosure.
Corporate governance disclosures
Following a review of a sample of annual reports from 2016-2018, the FCA makes a number of observations and suggestions in relation to compliance with the FCA rules relating to corporate governance, including:
- Compliance with the Principles of the Governance Code – The FCA encourages premium listed issuers to consider carefully, when stating how they have applied the Principles of the Governance Code as required under Listing Rule 9, whether they have done so in a way that enables shareholders to evaluate how the Principles have been applied (rather than merely stating they have been). To avoid boilerplate disclosures, more examples and cross-references to other parts of the annual report could be included.
- Board diversity reporting – Overall the FCA felt the quality of board diversity reporting could have been better, particularly in relation to Governance Code Provision 23 (work of the nomination committee), and Principles J (board appointment processes) and L (annual board evaluation).
- Standard listed companies – A number of standard listed companies provided little or no information on their internal control and risk management systems, and management bodies and committees (as required by DTRs 7.2.5 and 7.2.7). The FCA also noted that a number of standard listed issuers state that they have applied the Provisions of the Governance Code “as far as relevant” without providing any further detail (which does not meet the requirements of DTR 7.2.3).
Extension of relaxations to deadlines for financial reporting
In response to the difficulties being faced by listed companies as a result of the Covid-19 pandemic, earlier this year the FCA published statements which, in effect, give listed companies an additional two months to publish their annual report and accounts (to within six months of their year-end) and an additional one month to publish their half-yearly reports (to within four months after the end of the half-year). In PMB 31 the FCA confirms that this temporary relief will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021.
The Investment Association (IA) has published a statement calling for greater transparency on ethnic diversity on boards.
The statement notes the progress that has been made in relation to gender diversity on listed company boards following the Hampton-Alexander Review (see our blog post at the time). It also notes that the Parker Review on the ethnic diversity of UK boards recommended that each FTSE 100 board should have at least one director of colour by 2021.
The IA says that there is still significant progress to be made on improving ethnic diversity on boards, and that there should be greater transparency on the ethnic make-up of boards so that investors can assess that progress. It says that investors expect companies not just to state whether they meet the Parker Review recommendations but also to disclose the percentage of the board that comes from an ethnic minority background.
Separately, Legal and General Investment Management (LGIM) has commenced an engagement campaign on ethnic diversity on FTSE 100 boards. It says that, from 2022, it will vote against the chair of the nomination committee or the chair of the board if a company fails to meet LGIM’s expectations on ethnic diversity.
ICSA: The Chartered Governance Institute has published updated guidance notes and model terms of reference for board committees.
The audit committee, nomination committee and remuneration committee guidance notes and terms of reference have been updated to reflect the requirements of the 2018 edition of the UK Corporate Governance Code.
The Parker Review has published an update report on the ethnic diversity of UK boards. It says that, although progress has been made to increase the representation of ethnic minorities on FTSE boards in the UK, there is still much more work to be done.
In 2015, the government asked Sir John Parker to conduct a review of the ethnic and cultural diversity on UK company boards. Sir John published his final recommendations in October 2017 (see our corporate update 2017/21). The recommendations include:
- each FTSE 100 board should have at least one director of colour by 2021 and each FTSE 250 company board should have one by 2024; and
- companies should develop mechanisms to identify, develop and promote people of colour and provide details of their efforts to increase ethnic diversity in their annual report.
The key findings of the 2020 update report are that:
- 52 FTSE 100 and 54 FTSE 250 companies have achieved the target of having one director of colour on the board;
- there were 172 directors of colour in the FTSE 350, holding 178 director positions. This amounts to 7.5% of all FTSE 350 directorships where the ethnicity of directors was known; and
- only 15 directors of colour across the FTSE 350 companies that responded to the Parker Review occupied positions of chair or CEO.
The update report also makes further recommendations in relation to measuring board level diversity and building a pipeline for ethnically diverse board candidates, including that companies should:
- report fully on their ethnic diversity policies and activities, covering the board appointment process and the work of the nomination committee, as part of their Section 172 reporting requirements and their compliance with the UK Corporate Governance Code (ideally with reference to the Parker Review); and
- build a developed pool of high potential ethnic minority leaders and senior managers as part of a cross-sector sponsorship/mentoring programme.
The Investment Association (IA) has published a document discussing Listed company shareholder priorities for 2020. It focuses on four areas that IA members consider to be key drivers to long-term value. It also discusses the approach that IVIS, the IA’s corporate governance research service, will take in these areas when highlighting issues relevant to shareholders exercising their votes.
The four areas of focus are:
- Climate change – The IA says that investors are looking for significant progress from listed companies in implementing the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations (see our corporate update 2017/14). IVIS will introduce a new section to its ESG report (on environmental, social and governance issues), highlighting to investors whether a company has made climate change-related disclosures.
- Audit quality – The document notes that the quality and robustness of the audit is essential for investors but that, in practice, audit committee disclosures are often generic. The IA says that audit committee reports need to properly disclose where challenges have been raised, how professional scepticism has been applied and how a quality audit has been delivered. IVIS will revise its questions to encourage better disclosures around audit.
- Stakeholder engagement and employee voice – The IA says that investors are keen to better understand how directors are fulfilling their duties and taking account of the views of the company’s material stakeholders. IVIS will introduce two new questions to ascertain whether the board has identified a company’s material stakeholders and its engagement with them, and which of the four options for workforce engagement outlined in the Corporate Governance Code a company has adopted.
- Diversity – The IA notes the progress that has been made in relation to gender diversity on boards in light of the Hampton-Alexander Review. It also notes that investors expect companies to place greater emphasis on ethnic diversity, in particular in light of the Parker Review (see item 1 above). The IA says that IVIS will red top any FTSE 350 company where:
- women represent 20% or less of the board;
- there is one or less women on the board (unless the one third target is achieved i.e. a board of three directors); or
- women represent 20% or less of the Executive Committees and their direct reports.
For FTSE Small Cap companies, IVIS will amber top any company where women represent 25% or less of the Board; there is one or less women on the Board (unless the one third target is achieved); or women represent 25% or less of the Executive Committees and their direct reports.
The Hampton-Alexander Review aims to improve the representation of women in leadership positions of FTSE 350 companies and has set a target of having 33% of all board and senior leaderships positions to be held by women by the end of 2020.
In November 2019, the Review published its 2019 FTSE Women Leaders Report on improving gender balance in FTSE leadership.
The key findings in the report are:
- Board representation – 32.4% of board positions in FTSE 100 companies are held by women (up from 30.2% in 2018) and 29.6% in FTSE 250 companies (as compared with 24.9% in 2018). The report says that half of all FTSE 100 boards have already met or exceeded the 33% target, with a further 20 companies well on their way to doing so.
- Executive Committees and Direct Reports – The number of women in executive committee roles and in roles directly reporting to the executive committee has increased: in the FTSE 100, the figure increased to 28.6% (from 27% in 2018) and in the FTSE 250 the figure has increased to 27.9% (from 24.9% in 2018). However the report says that the pace of change is too slow. If the 33% target is to be met by the end of 2020, half of all available appointments will need to go to women in 2020.
- CEOs and Chairs – There has been little movement in the number of women in CEO or Chair roles. The report says that a sharper focus is needed to understand what is happening in the appointment process for these top jobs.