New EU rules are requiring additional non-financial disclosures to be included in the annual reports of larger listed companies (European Union Regulations 2017).  A Diversity Report is to be included in the corporate governance statements which will include information on the age, gender or educational and professional backgrounds of the board’s directors. In addition, the Diversity Report is also to include details of the company’s diversity policy including the objective of the policy, implementation information and results.   Penalties for failure to comply are also outlined in the legislation which include up to six months imprisonment (European Union Regulations 2017, Sec 8).

However, these disclosure requirements are on the basis that the company can provide “an explanation as to why there is no policy” (European Union Regulations 2017, Sec 6.3).  This provision is similar to the UK Corporate Governance Code which operates on a “comply or explain” basis (Financial Reporting Council 2016, p.4).   The Code has provided a detailed explanation of this to mean that “the company should aim to illustrate how its actual practices are consistent with the principle to which the particular provision relates, contribute to good governance and promote delivery of business objectives. It should set out the background, provide a clear rationale for the action it is taking, and describe any mitigating actions taken to address any additional risk and maintain conformity with the relevant principle. Where deviation from a particular provision is intended to be limited in time, the explanation should indicate when the company expects to conform with the provision” (Financial Reporting Council 2016, p.4).   The purpose of this policy is to build a principal based regime which allows for flexibility that is often required due to changing business circumstances.  Research indicates that companies are increasingly complying with the Code, however, there is frequent use of standard explanations in the case of non-compliance (Arcot et al. 2010).

The new EU rules do not provide such a detailed description of a suitable explanation, and thus the new rules may act more as a principal to be followed and enforced by shareholders at AGM than a law enforceable through criminal penalties. However, the requirements are not onerous and many companies already produce more detailed diversity reports than these rules require, for example, Marks and Spencer’s.  In addition, by stating clearly the elements of diversity to be highlighted, it may support board members and shareholders advocating for greater diversity and support board discussion on the merits of pursing a comprehensive diversity strategy for the organisation overall as well as at board level.

References

Arcot, S., Bruno, V. & Faure-Grimaud, A., 2010. Corporate governance in the UK: Is the comply or explain approach working? International Review of Law and Economics, 30(2), pp.193–201.

European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017, SI No 360

Financial Reporting Council, 2016. The UK Corporate Governance Code (April 2016). , pp.1–37.