Corporate governance watchdog urges companies to apply the intended changes to the Code with immediate effect
The Financial Reporting Council today announced that it is amending the UK Corporate Governance Code (the Code) to strength the principle on boardroom diversity which was first introduced into the Code in June 2010. The amendments will require listed companies to report annually on their boardroom diversity policy, including gender, and on any measurable objectives that the board has set for implementing the policy and on the progress it has made in achieving the objectives. The FRC’s announcement is here and the supporting Feedback Statement is here.
Background: The Davies Review and FRC consultation
In February 2011 Lord Davies produced his review of “Women on boards” (which we discussed in this post). One of Lord Davies’ recommendations was that the FRC:
“should amend the UK Corporate Governance Code to require listed companies to establish a policy concerning boardroom diversity, including measurable objectives for implementing the policy, and disclose annually a summary of the policy and the progress made in achieving the objectives”.
Accordingly, the FRC conducted a consultation on these suggested changes to the Code (which we discussed here). Today’s Feedback Statement summarises the main points from that consultation exercise and states the decisions taken by the FRC to amend the Code.
Amendments to the Code
Provision B.2.4 of the Code – in the section dealing with appointments to the Board – will be amended by the introduction of the following italicised wording:
“A separate section of the annual report should describe the work of the nomination committee, including the process it has used in relation to board appointments. This section should include a description of the board’s policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives. An explanation should be given if neither an external search consultancy nor open advertising has been used in the appointment of a chairman or a non-executive director.”
The supporting principle to B.6, which addresses board evaluation, will be amended by the introduction of the following wording:
“Evaluation of the board should consider the balance of skills, experience, independence and knowledge of the company on the board, its diversity, including gender, how the board works together as a unit, and other factors relevant to its effectiveness.”
Timing of these changes
The FRC has decided to defer implementation of these changes to the Code. The result is that the changes will be incorporated into an updated edition of the Code to be published in 2012 and which will apply to financial years beginning on or after 1 October 2012.
However, the FRC stresses that companies should apply and report on these intended additions to the Code with immediate effect:
“The FRC’s 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 would strongly encourage all companies voluntarily to apply and report on the intended additions to the Code with immediate effect.”
The reason that an updated edition of the Code is not being produced until 2012 is that the FRC wants to be able to incorporate any changes to the Code that may come out of work currently under way in these areas:
- The FRC’s ongoing work on “Effective Company Stewardship”, which we discuss in this post.
- The Sharman Inquiry into going concern and liquidity risk, which we discuss in this post.
- The Government’s work on narrative reporting, which we discuss in this post.
An implementation date of 1 October 2012 should also mean that the new requirements on diversity in the Code will apply from the same date as the Government’s proposed regulations requiring companies to disclose information about the percentage of women at different levels of the organisation.
The FRC confirms in the Feedback Statement that it does not intend to produce further guidance on how boards might develop diversity policies.
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