Diversity, an expanding area: EU and UK policy moves

Early measures concentrated on women's remuneration and senior-level representation, leaving the expectation of other types of diversity largely implicit. The UK recently introduced boardroom racial representation targets, and is considering provisions covering aspects such as socio-economic background. It is also emphasising the need for inclusion.

Diversity is a compliance concern at two levels, the higher one being potential breaches of anti-discrimination laws set by countries and, for its member states, the EU. Headline legislation includes the UK's Equality Act 2010 and EU directives covering race, gender and aspects such as belief, disability and sexual orientation. These form the environment in which firms and regulators operate, so that a firm can obey every regulation yet still face damaging legal action.

In December 2022, the European Commission proposed two new directives to strengthen the application of the EU's anti-discrimination law and level discrepancies between member states. The directives would set minimum standards for national bodies that uphold equality laws, giving them the ability to bring legal actions and imposing a requirement that they "promote equality duties … and positive action among public and private entities". The proposals may be a long way from becoming law, but they reflect EU institutions' direction of travel.

A "Women on Boards" directive adopted late last year must be transposed into national law by December 2024, with minimum board representation targets and board composition reporting requirements applying from June 2026. The EU Parliament and Council also reached agreement on a pay transparency directive to include gender pay gap reporting. Larger UK employers have had to evaluate and report gender pay gaps since 2018, and similar Irish rules took effect in 2022.

Financial regulation: reducing group-think

Financial regulation concerning diversity and inclusion applies in addition to statutory legal protections and has different objectives. Its underlying philosophy is that diversity, especially among senior managers, reduces group-think and promotes critical challenge. It also ensures firms reflect the composition of their workforce and the general population, improving customer service and risk oversight.

The Fourth Capital Requirements Directive (CRD IV) put this into regulatory form. Recital 60 said management bodies should be "sufficiently diverse as regards age, gender, geographical provenance and educational and professional background", with particular importance attached to gender balance. CRD IV required firms to have a diversity policy for management body appointments (art 91(10)), and a policy-backed target for boardroom female representation (art 88(2)(a)).

The revised Markets in Financial Instruments Directive (MiFID II) made similar requirements, and joint European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) guidelines state that firms need a staff diversity policy to ensure a diverse pool for management appointments. The Fifth Capital Requirement Directive (CRD 5) added requirements for gender-neutral remuneration policies and benchmarking pay gaps and the EBA updated its guidelines on these rules last June.

The UK Financial Conduct Authority (FCA) went further than the EU with policy statement PS22/3. This added Listing Rule 9.8.6(9), setting a "comply or explain" 40% female minimum requirement for boards, with at least one of the chair, chief executive, chief financial officer or senior non-executive director to be a woman. Boards must also have at least one director from a non-white minority ethnicity. Company annual financial statements must meet this from April 2023.

Anti-discrimination laws already protect a gamut of characteristics, but PS22/3 took the uncommon step for financial regulation of spelling out that firms must consider all diversity, including unprotected forms. New rule DTR 7.2.8A requires corporate governance statements to describe a company's diversity policy regarding a non-exhaustive list of characteristics that includes "educational, professional and socio-economic background", which are outside the Equality Act 2010.

DTR 7.2.8C says companies "may" provide numerical data on diversity with 7.2.8A disclosures.

"These changes are to clarify that existing disclosures on board diversity policies could consider wider diversity aspects than those currently referenced, such as sexual orientation, socio-economic background and disability, and to extend the requirement to disclose a diversity policy to include policies of key board committees: audit, remuneration and nominations," the FCA said in PS22/3.

Firms take action

Aware of its intrinsic importance as well as regulators' concerns, many firms are acting to improve diversity. Apex Group's 2020 "Shadow ExCo" gave a diverse group experience of involvement in C-suite decisions and led to two women being promoted to its executive committee. Building on that, the solutions company created its Women's Accelerator Program in 2022. More than half the participants were promoted or secured other progressions and the firm nearly doubled the program's places for 2023.

"We are extremely proud of the immediate and noticeable impact the program has had in its first year, not just in the measurable impact on progressions for the members of the 2022 cohort but also by the strength of the community we have built," said Lakshmi Woodings, Apex's head of corporate social responsibility in London.

"Equity represents fair access to opportunities, resources and the power to thrive in careers: it is the targeted outcome of embedded diversity and inclusion principles in a company."

A forward-thinking attitude is sensible. PS22/3 described the new rules for women and ethnic minorities as "a starting point" toward improving diversity of thought and experience through wider representation of many groups. A joint FCA- Prudential Regulation Authority (PRA) consultation on diversity and inclusion policy proposals is scheduled for between April and July. It may draw on an FCA multi-firm review of approaches to diversity and inclusion in financial services last December.

The review found enthusiasm but poor use of data of often variable quality, efforts concentrated on senior level diversity whereas the biggest drop in representation was between junior and middle grades, and a failure to appreciate that diversity and inclusion are

cultural issues. Inclusion was less well-understood and received less attention than diversity, despite the FCA regarding it as vital for an environment where people feel empowered to "speak up" about concerns — essentially the critical challenge CRD IV sought.

Inclusivity

Inclusivity is something of a neglected twin because, as FCA discussion paper DP21/2 observed, diversity is easier to measure and achieve. It has defined inclusion as a culture where "everyone feels involved, valued, respected [and] treated fairly". Paying insufficient attention to inclusion is a basic error which firms should avoid, said Jill Miller, senior diversity and inclusion policy adviser at the Chartered Institute of Personnel and Development (CIPD), a professional body for human resources.

"Organisations should focus on inclusion as well as diversity," Miller said.

"A diverse range of people won't apply to work at an organisation, or stay with one, where they don't feel valued, respected and that they have equality of opportunity to develop and progress. In an inclusive workplace, people feel able to be themselves at work, are treated with dignity and respect [and] there is transparency to how you progress in the organisation."

With its requirement that different groups with varied characteristics all feel safe being themselves, inclusion can be an issue where colleague disputes erupt like fireballs. Tolerating sexual or racial harassment would clearly violate anti-discrimination law and FCA requirements on misconduct. Situations where members of different diversity groups are at odds, for example, about who can use female-only lavatories, are much more problematic.

Guidance and training for managers

Firms need clear, thoroughly disseminated policies on diversity, inclusion, bullying, harassment and discrimination, with concerns addressed in a sensitive manner as soon as they arise. That requires managers with training and guidance on dealing with workplace conflicts who understand grievance and disciplinary procedures, but firms often over-estimate their effectiveness at handling inclusion- related problems, Miller said.

"In [the CIPD's] Inclusion at Work 2022 survey, 72% of employers agreed that managers deal with any discrimination, bullying, or harassment issues promptly, seriously and discreetly," Miller said.

"However, when employees were asked how effective their people manager was in dealing with conflict they experienced, either an isolated dispute or ongoing difficult relationship, one in three (32%) agreed their manager made the situation worse."

This article was originally published on March 8, 2023 by Thomson
Reuters Regulatory Intelligence (link to gated login content).