Diversity mandates eyed by UK watchdog for listed companies’ boards

The largest listed companies in London will have to appoint a minimum number of diverse board members or face regulatory scrutiny, under measures being weighed by the UK markets watchdog.

Financial services companies more widely will also need to improve diversity at senior levels, Nikhil Rathi, the Financial Conduct Authority’s chief executive, said in one of his first major speeches detailing policy changes.

Rathi pointed to Nasdaq, which has already stated that companies listed on its US exchange should have at least two non-white or female board members, or explain why not.

“As part of our regulatory work on diversity and inclusion and the listings framework, we will be exploring whether we should make similar requirements part of our premium listing rules,” Rathi said on Wednesday.

Before he became the FCA’s chief executive in October, Rathi headed the London Stock Exchange. He said that having a balanced board improved a company’s ability to serve its customers and avoid blind spots and biases.

His comments are the latest effort to try to jettison all-male, all-white boards. Recent data shows that the number of women on FTSE boards has risen by 50 per cent since 2015, to 1,026. As of January, there were no longer any all-male boards in the FTSE 350. But more than a hundred FTSE 350 companies are still not meeting a target set by a government-backed review of having at least a third of board positions held by women.

The financial sector has not done enough to improve gender and racial diversity at the most senior levels, Rathi said, adding that the FCA could use wider powers, including refusing regulatory approvals for senior managers, unless companies display greater inclusivity.

“In the years ahead, if we don’t see improvements in diversity at senior levels and better answers, we will also consider how to best use our powers,” Rathi said.

The FCA’s thinking around what tools it will deploy are at an early stage.

Elisabeth Bremner, a financial-services partner at CMS, the law firm, said: “To get any changes to really bite, FCA needs to decide quickly just how interventionist it is prepared to be in stepping up its supervisory powers.”

The FCA has focused on improving the culture at financial services companies after a string of scandals over the past decade that tainted London’s reputation for corporate governance.

That focus included a regime to improve accountability, with senior managers held responsible for failings on their watch. Since then, the FCA has started to look at complaints about workplace culture, including whistleblower warnings about sexual harassment, homophobia and bullying.

“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?”

Rathi admitted that the FCA itself had work to do to improve diversity among its ranks. It missed its target of having 45 per cent of women in senior positions by 2020 by five percentage points. But once new appointments are included, 10 of 19 board or executive positions are held by women.