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Feb 25, 2021

UK companies face greater scrutiny over board diversity

Investment Association to issue alerts against companies that fail to meet racial and gender diversity goals

UK companies will face increased scrutiny over the ethnic and gender diversity of their boards at this year’s AGM season after an investor trade body updated its ESG expectations.

The Investment Association (IA), which represents investors managing around £8.5 tn ($12 tn), says it will issue an ‘amber-top’ warning on FTSE 350 companies that do not disclose either their board’s ethnic diversity or a ‘credible plan’ to achieve targets set by the Parker Review.

The Parker Review, launched in 2017, calls for FTSE 100 companies to have at least one board member with an ethnic minority background by 2021, and by 2024 for FTSE 250 members.

In addition, the IA says companies will receive a ‘red-top’ warning where the board is 30 percent or less female, a rise from 20 percent in last year’s guidance. 

The IA’s Institutional Voting Information Service uses red-top alerts to signal the highest level of concern over a company’s behavior, followed by amber warnings to identify ‘a significant issue’ that investors should consider.

Last year, a report by the Parker Review found around three fifths (59 percent) of FTSE 350 companies did not have ethnic minority representation on the board. It added that the 2021 target for FTSE 100 companies looked ‘very challenging’ to complete. 

‘The UK’s boardrooms need to reflect the diversity of modern-day Britain,’ says Andrew Ninian, director for stewardship and corporate governance at the IA, in a statement.

‘With three quarters of FTSE 100 companies failing to report the ethnic makeup of their boards in last year’s AGM season, investors are now calling on companies to take decisive action to meet the Parker Review targets. Those who fail to do so this year will find themselves increasingly under investors’ spotlight.’ 

UK companies have had more success at improving gender diversity, according to new research. The final report from the Hampton-Alexander Review, released this week, says the number of female board directors in the FTSE 350 has doubled over the last five years.

Both the FTSE 100 and the FTSE 250 achieved the target of having at least 33 percent female representation on boards by the end of 2020, notes the report. 

In its updated guidance, the IA also says scrutiny over corporate disclosure on climate change will intensify. Companies deemed to be most at risk from global warming will receive an amber-top warning if they don’t report against the TCFD recommendations, the association says.

The TCFD’s 11 recommendations are spread across four areas: governance, strategy, risk management, and metrics and targets. Research conducted last year found two thirds of FTSE 100 companies now mention TCFD in their annual report.

Investors have increased their focus on racial diversity following the Black Lives Matter protests that took place last year. In one example, Legal & General Investment Management said it would vote against FTSE 100 and S&P 500 boards that don't meet its expectations on this issue.

BlackRock also discusses diversity in CEO Larry Fink’s 2021 annual letter to business leaders. ‘While issues of race and ethnicity vary greatly across the world, we expect companies in all countries to have a talent strategy that allows them to draw on the fullest set of talent possible,’ he writes. 

‘As you issue sustainability reports, we ask that your disclosures on talent strategy fully reflect your long-term plans to improve diversity, equity and inclusion, as appropriate by region.’