Ashurst Governance and Compliance update Issue 4

1.  Diversity in the boardroom and beyond: FCA consults on requiring reporting on targets and increased transparency

For some time the Financial Conduct Authority (FCA) has stated that diversity is a regulatory issue. To that end it has now published a consultation (CP21/24) which proposes significant changes to the FCA rulebooks on the issue of board and senior management diversity. The consultation follows hot on the heels of the Discussion Paper (DP21/2) it published in conjunction with the Prudential Regulation Authority (PRA) and the Bank of England (BoE) focusing on improving diversity and inclusion in the financial services industry and seeks to build on the government-backed Hampton-Alexander and Parker reviews.

Disclosures relative to gender and ethnic minority representation targets – "comply or explain"

CP21/24 proposes amendments to the FCA's Listing Rules requiring listed companies to publish annually a ‘comply or explain statement’ on whether or not they have achieved the following proposed targets for gender and ethnic minority representation on their boards:

• At least 40% of the board should be women (including those self-identifying as women) – a target beyond the 33% set by the Hampton-Alexander Review.
• At least one senior board position (Chair, Chief Executive Officer, Chief Financial Officer or Senior Independent Director) should be a woman (including individuals that self-identify as a woman) – a proposal which echoes the recommendation of the final report of the Hampton-Alexander Review published in February 2021.
• At least one member of the board should be from a non-white ethnic minority background (as defined by the Office for National Statistics) – thereby echoing the Parker Review recommendations for the FTSE 250.

Given that disclosure operates on a "comply or explain" basis, the FCA underlines that they are not mandatory quotas, rather a "positive benchmark" for issuers to report against. New guidance indicates that an in-scope company (see section below - Companies in scope) might also wish to include:

• a brief summary of any key policies, procedures and processes, and any wider context, that it considers contributes to improving the diversity of its board and executive management;
• any mitigating factors or circumstances which make achieving diversity on its board more challenging, such as the size of the board or the country in which its main operations are located; and
• any risks it foresees in being able to meet or continue to meet the FCA's board diversity targets in the next accounting period, or any plans to improve the diversity of the board.

As part of the same annual disclosure obligation, in-scope issuers would also be required to disclose data on the make-up of their board and the most senior level of executive management in terms of gender and ethnicity. This would be presented in a standardised format to facilitate comparison. In addition, views are sought on whether, in future, the FCA should consider requiring disclosure of data on representation by sexual orientation at these levels, and/or whether to extend diversity data reporting to capture one-level below executive-level management.

By way of reminder, the UK Corporate Governance Code already recommends that the annual report of the nomination committee should disclose the gender balance of those in senior management (the executive committee or first layer of management below the board, including the company secretary) and their direct reports. Similarly, the Companies Act 2006 requires quoted companies to disclose in their Strategic Report gender diversity statistics in various strata of the business.

Enhancing disclosures on the operation of board diversity policies

In order to encourage broader consideration of diversity at board level, the FCA is also proposing changes to the corporate governance rules within the Disclosure Guidance and Transparency Rules (DTR). These changes would augment existing DTR requirements as regards board diversity policies to:

• indicate that disclosures concerning such policies should describe how they apply to the board's key committees – i.e. the audit, remuneration and nomination committees; and
• clarify that the aspects of diversity to which any such diversity policy may apply could include, for example, considerations of ethnicity, sexual orientation, disability, or lower socio-economic background, in addition to the aspects of diversity already referred to in the rule.

New guidance would also encourage companies to add numerical data on the diversity of members of the board and its committees when discharging their existing obligation to describe the results of their diversity policy during the reporting period.

Companies in scope

The proposed changes to the Listing Rules would apply to UK and overseas companies with equity shares, or certificates representing equity shares, in either the premium or standard listing segments of the FCA’s Official List. Open-ended investment companies, shell companies, issuers of debt securities and securities derivatives would not be caught. The DTR changes would apply to companies with securities traded on UK regulated markets, such as the main market of the London Stock Exchange and, again, to certain overseas listed companies.

Responses to the consultation are requested by 20 October 2021. Subject to the feedback received, the FCA currently intends to publish final rules later in the year with a view to them applying to financial periods beginning on or after 1 January 2022. That said, early adoption will be encouraged.

A summary of the joint FCA, PRA, BoE Discussion Paper relating to the financial services industry can be found in our AGC update – Issue 3.

Ashurst comment: The proposals mark a watershed moment for board composition. They may not impose mandatory targets but their effect is likely to be the same. In many ways, they come as no surprise. Progress on certain aspects of diversity, particularly ethnic diversity, has all but ground to a halt and the quality of reporting on diversity, and by nomination committees generally, continues to lack the specificity and insight that the FCA and the Financial Reporting Council have long sought.

2. Research published on board diversity and effectiveness in FTSE 350 companies

Prior to the launch of the FCA's consultation, the Financial Reporting Council (FRC), in conjunction with the London Business School Leadership Institute and SQW, published research focused on board diversity and effectiveness in FTSE 350 companies and, in particular, the qualitative effects of diversity in terms of performance, boardroom culture and dynamics. It finds that the effort to diversify boards benefits boardroom culture and overall organisational performance. It suggests that to maximise these benefits, boards should recognise that changes take time and that diversity without active inclusion is unlikely to encourage new talent to the board.

The research addresses three questions:

1. How have board effectiveness and dynamics been impacted by the increased gender and ethnic diversity of board membership?
2. What attributes, skills and experience do today's board members expect will be needed in the diverse boardrooms of the future?
3. How can nomination committees be helped to take a more objective and "diversity-friendly" approach to board recruitment?

The main findings of the research conclude that:

• It is the responsibility of the board chair to drive inclusion.
• Many board members are committed to diversity and boards have made efforts to improve this, with some success, especially with regards to gender diversity.
• Efforts to diversify boards do reap rewards in terms of boardroom culture and performance.
• Regulators and companies must focus on collecting more data on the types of diversity, board dynamics and social inclusion.
• The nomination committee should itself be diverse and have a clear mandate to work with search firms that access talent from wide and diverse pools. It should also set and regularly report on diversity targets.
• Boards still have some way to go to fully access the talent and reflect the population of the UK at large.

Ashurst comment: The report makes for interesting reading and makes a strong case that gender diversity on boards leads to companies outperforming their less diverse peers. That the report is less able to do so in relation to ethnic diversity is attributed to a lack of available comparative data, one issue which lies at the heart of the FCA's subsequent proposals.

3. Reporting on stakeholders, decisions and Section 172 and FR Lab newsletter

We covered the publication of the Financial Reporting Lab's report on "Reporting on stakeholders, decisions and Section 172" in AGC update – Issue 3. By way of follow-up, the FR Lab has now published a three page summary of its report.

The FR Lab has also published its latest newsletter, its second of 2021. This provides a reminder of all of its recent publications and aspects of related FRC work. It also highlights future publications, including the FR Lab's intention to publish guidance in the Autumn on the European Single Electronic Format to help relevant companies prepare for its mandatory application next year.

4. ISS publishes survey on 2022 voting policies

Institutional Shareholder Services (ISS) has launched its Annual Benchmark Policy survey which addresses a number of topics, including:

• the use of non-financial ESG performance metrics in executive compensation;
• the use of third-party racial equity audits; and
• the conduct of on-line or "virtual-only" shareholder meetings.

ISS has also launched a separate climate survey focusing on minimum criteria for boards in overseeing climate-related risks, and market sentiment on shareholders having the right to vote regularly on a company's climate transition plans.

Responses are requested on or before 20 August 2021.

5. Draft legislation for HMRC to clamp down on promoters of tax avoidance - what this means for corporates

The government has published draft legislation to be included in the Finance Bill 2022. There is a significant focus on cracking down on the promoters of tax avoidance. Promoters of tax avoidance can be anyone who is to any extent responsible for the design of any tax avoidance scheme, anyone who makes the arrangement available for implementation or makes a firm approach to another person with a view to making the arrangement available.

Although the government has decided not to include a proposal in the draft legislation to empower the Secretary of State to disqualify directors when there has been a significant breach of anti-avoidance rules, the following new measures are in the draft legislation:

• a new power for HMRC to seek freezing orders that would prevent promoters from dissipating or hiding their assets before paying the penalties that are charged as a result of them breaching their obligations under the anti-avoidance regimes;
• new rules that would enable HMRC to make a UK entity, which facilitates the promotion of tax avoidance by offshore promoters, subject to a significant additional penalty. This penalty can be an amount up to the total amount of fees, remuneration or other consideration received by the promoter;
• a new power to enable HMRC to present winding-up petitions to the Court for companies operating against the public interest. This power is extremely widely drafted and can be used whenever HMRC consider that it is in the public interest for the purposes of protecting the public revenue. The court is empowered to order a winding up of the body if it determines that it would be just and equitable to do so;
• new legislation that would enable HMRC to name promoters, details of the way they promote tax avoidance, and the schemes they promote, at the earliest possible stage, to warn taxpayers of the risks and help those already involved to get out of avoidance. Again, given the definitions of promoters and tax avoidance are extremely broad, HMRC would have a wide discretion to decide whether a promoter should be "named and shamed".

This package of measures (which significantly strengthen HMRC's existing arsenal) demonstrates HMRC's continued commitment to pursue those promoting tax avoidance. The significant penalties, the reputational damage of "naming and shaming" and the ultimate sanction of a winding-up petition present serious risks for businesses involved in promotion of such tax avoidance arrangements. This reinforces the need for boards of directors (particularly of businesses in the financial services or advisory sectors) to ensure that they have strict policies and robust governance frameworks to monitor tax risks including the promotion of tax avoidance arrangements and this may now mark an opportune time for some to refresh their tax governance polices.

Item contributed by Nicholas Gardner, a Partner in our Tax team.

6. Companies House guidance on same day filing: Statement of capital on a reduction

Companies House has announced that a same day service is now available for companies filing Form SH19 (Statement of capital when reducing capital in a company) supported by a solvency statement. However, where Form SH19 is supported by a court order, the form and all relevant supporting documents must be sent to Companies House by post.

To utilise the same day service, Form SH19 must be uploaded to the Companies House website together with the relevant supporting documents by 11.00 a.m. to be processed on the same day. Any forms and documents uploaded after 11.00 a.m. will be processed on the next working day.

Other same day services remain suspended, with the exception of same day company name changes and company incorporations.