The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have adopted slightly different approaches in their consultations, with the PRA generally being a bit more prescriptive, but they are aligned on the importance of Board diversity and the role of the Board in overseeing and embedding D&I.
Diversity & Inclusion at Board level
For the regulators, increasing diversity of thought is not just about creating competitive advantage, it is also about meeting consumer needs, financial stability, and prudent risk management.
Therefore, the regulators propose to strengthen existing requirements, from requiring a "policy promoting diversity" on the Board and targets focussed on gender, to having a "strategy promoting diversity and inclusion" and targets for a broader range of underrepresented groups. The PRA specifies that the Nomination Committee (NomCo) should prepare proposals to be agreed by the Board, rather than these being decided at NomCo level, and that these should be reviewed (and updated if required) every two years. For dual-regulated firms, this Board diversity and inclusion policy must be published on a firm's website, alongside the firm-wide strategy.
Diversity
Diversity of thought at the Board starts with increasing diversity of composition. Both regulators expect large firms to set "stretching but realistic" diversity targets for the Board. These targets will not only challenge the Board to regularly consider the demographics of their membership but will also contribute to the firm's "tone from the top" and frame the expectations to be followed by the rest of the firm.
There is some divergence between the PRA and FCA proposals on which specific demographic targets should be covered. Whilst all firms should be prepared to explain the steps they are taking to set, implement and monitor their targets, dual-regulated firms should expect greater supervisory engagement on the gender and ethnicity targets required in the PRA's proposals.
Inclusion
Meeting targets to create a more diverse Board will not, on its own, increase diversity of thought. The Board must also be inclusive: individual Board members must be able to share their insights and have these adequately considered in decision making processes.
This is underlined by the new requirement to develop a strategy to promote diversity and inclusion at the Board, going further than existing PRA Rulebook requirements for firms to have a Board policy to promote diversity. This strategy should aim to both increase diversity of experience and drive inclusive practices.
The role of the Chair will be critical in driving this strategy and cultivating a good boardroom culture that encourages contributions from the diverse experience of directors and actively considers these contributions in discussion and decision making.
Considerations for Board D&I strategies
The Board strategy should inform and be informed by performance against diversity targets. The strategy will need to consider the Board's approach to building a candidate pipeline, including recruitment, appointment processes, and succession planning. Particular consideration will be required for Board positions held by executives, where the alignment of diversity targets for senior management and the Board will be important. Annual individual and collective Board skills and performance assessment processes should also seek to evaluate underrepresented characteristics, the diversity of experience of Board members, and the culture of inclusion at Board level.
Overseeing D&I strategies
The overall proposals also set clear expectations on the role of the Board in setting, maintaining and overseeing the firm's D&I strategy.
Boards already have responsibility for overall firm strategy and culture but the regulators' proposals will require a more explicit focus on D&I. For example, Boards will need to:
- take ownership of the firm's D&I strategy, providing review and challenge on a regular basis before approval;
- monitor progress of the firm's D&I strategy through review of regular reporting, including in relation to the firm website disclosures proposed by the regulators;
- identify obstacles that may contribute to adverse diversity and inclusion outcomes, and target interventions where needed;
- review and challenge the quality and usefulness of metrics developed to measure diversity and inclusion;
- hold management to account for promoting diversity and an inclusive culture that fosters open exchange of ideas, constructive debate, and sound decision-making; and
- oversee the establishment of processes to cultivate a strong and diverse talent pipeline.
Consumer Duty
The Board will also need to consider the firm's D&I strategy in the context of the Consumer Duty. Boards will need to consider how they cater for a diverse consumer base as part of the existing Consumer Duty requirements, supported by the firm's D&I strategy.
Risk oversight
The proposals also introduce new guidance to make clear that matters relating to D&I are to be considered as a non-financial risk and treated appropriately within the firm's governance structures. This extends the responsibility of the Board and senior management with regards to risk oversight.
Calibrating existing governance
The FCA and PRA proposals are probably flexible enough to allow most firms to review and fine tune existing governance arrangements. However, there are some areas that may require more focused attention.
For example, consideration of whether remuneration and incentives arrangements are appropriate for driving progress on D&I should be considered alongside the new rules on the "bankers' bonus cap", in relation to which the PRA and FCA have cautioned that firms should mitigate the risk of increasing the gender pay gap.
The next post in this series will focus on the proposals relating to risk management.
