The rule change, now open for consultation, would oblige companies to issue annual “comply or explain” statements that disclose whether they have reached certain diversity targets—for women and ethnic minorities—and include data on the composition of their boards and top managers.

Under the proposal, companies would be aiming to have boards that are at least 40% women—including self-identified women—with a woman occupying at least one senior board position, and at least one member coming from a non-white ethnic minority background. The FCA’s consultation also considers other aspects of diversity, such as disability and sexual orientation.

If the consultation goes well, the FCA intends to start applying the new rules later this year. Its director of market oversight, Clare Cole, said in a Wednesday statement that the proposals would “provide better data for companies and investors to assess progress in these areas and make investment decisions, reduce investor search costs, and inform shareholder engagement, enhancing market integrity.”

“There is a current lack of standardized and mandatory transparency about diversity on listed company boards, particularly outside the FTSE 350 who do not provide data to the voluntary initiatives in this area,” Cole said. “But interest from investors is growing and companies are increasingly focusing on this topic due to ESG investing, as well as wider social and public policy concerns.”

The regulator insisted the targets are not quotas as they are not mandatory, but rather provided “a positive benchmark for issuers to report against.”

Nasdaq similarities

In many respects, the watchdog’s proposals are not dissimilar to those made at the end of last year by Nasdaq—ideas that are currently being considered by the U.S. Securities and Exchange Commission, with a decision expected this summer.

The Nasdaq proposals would also mandate the disclosure of standardized board-diversity data, albeit accompanied by the threat of delisting for companies that fail to comply and don’t publicly explain why they are not complying. The targets would include at least one woman and one underrepresented minority or LGBTQ member on each Nasdaq-listed board—although, in trying to gain SEC approval, Nasdaq would now only apply the target of two diverse directors to companies with board of six or more directors; smaller boards would be fine with just one.

The idea has certainly proved controversial in the U.S., with New York Stock Exchange president Stacey Cunningham arguing it risked “defining the investable universe,” even though the NYSE shared Nasdaq’s view that diversity increases performance. “We just don’t think we should be using our listing standards because that forces our views on investors and prevents them from being able to make the choices that they want to make and that they are making,” Cunningham said in December.

The “comply or explain” approach has also been adopted by the Toronto Stock Exchange, where it has been hugely successful in boosting the representation of women on the boards of large public companies.

Legal quotas

Some governments have taken the legal route to achieve the same aims. California’s, for example, passed laws in 2018 and 2020 that mandated greater board diversity on both gender and racial fronts.

The first law reduced the proportion of all-male public company boards in California from 30% to 3% in two years. As for the second, corporate boards in the state will need to have at least one member from an underrepresented community by the end of this year, with the quota rising for larger boards as of 2022.

France passed a law mandating a 40%-women quota for large companies’ boards a decade ago, and this year it passed another law setting the same target for their top management posts—though companies have until 2030 to fully comply, with a 2027 interim deadline for hitting at least 30%.

In Germany, a new law awaiting upper-house approval this summer would oblige the largest public companies with management boards of more than three members to give at least one of the seats to a woman.

Germany has already had a voluntary quota of 30% for companies’ supervisory boards since 2015. The government says the new law would affect 66 companies, of which nearly a third have no female management-board members at all.