Regulators in the US and UK are encouraging more diversity and inclusion across the financial services sector
by Bethan Rees
Nasdaq-listed companies in the US will have to publicly disclose the gender and racial makeup of their board of directors, after the Securities and Exchange Commission (SEC) approved a proposal by the American stock exchange, according to Jacqueline Sergeant for Financial Advisor Magazine. If boards do not have at least one female director and one director who identifies as an "underrepresented minority or LGBTQ+", companies will have to provide explanations as to why.
The proposal is the outcome of discussions at Nasdaq "with leaders representing a broad spectrum of market participants and stakeholders", says Sergeant. To help companies achieve compliance, the proposal includes an optional one-year access to a board recruiting service, which "would provide entry to a network of board-ready diverse candidates for companies to identify and evaluate".
Nasdaq says the current lack of transparency is creating "barriers to investment analysis, due diligence, and academic study, and affects investors who are increasingly basing public advocacy, proxy voting, and direct shareholder-company engagement decisions on board diversity considerations", writes Sergeant.
Financial Advisor Magazine article
Regulatory push by the US and UK
Regulators in the US and UK will be looking closer at diversity and inclusion (D&I) policies "to speed up the pace of transformation" in the financial services sector, according to Joy Macknight for The Banker.
The FCA, Prudential Regulatory Authority (PRA) and the Bank of England (BoE) published a consultation paper on 7 July 2021, seeking responses on 29 questions covering D&I, with the consultation closing on 30 September. The paper recommends that all UK regulated firms should "disclose a selection of aggregated diversity data on their senior management and workforce as a whole, as well as their diversity and inclusion policies, so that other firms and stakeholders can benchmark progress", writes Macknight.
In the US, the New York State Department of Financial Services (DFS) announced its intention "to collect data on the gender, racial and ethnic makeup of boards and senior management from New York-regulated banks and other non-bank financial institutions with more than US$100m in assets, as well as regulated cryptocurrency firms". This process will start in autumn 2021 and be published on an "aggregate basis" in the first quarter of 2022, says Macknight. To help firms with their D&I efforts, the DFS will organise a webinar showcasing best practices and addressing specific issues. "This type of assistance is important to encourage institutions to make real progress on D&I, not just dismiss it as another box-ticking exercise," she writes.
Other D&I tools have been launched in the UK, for example, the Financial Services Skills Commission’s Inclusion measurement guide and Tech Nation’s D&I toolkit (for the fintech community).
The DFS superintendent Linda Lacewell is quoted in the article: "It is now more than ever paramount that the banking and financial industries have strong boards and executive teams comprised of people with diverse experiences, skills and perspectives in order to better confront evolving risks and find new opportunities."
The Banker article
Bonuses for diversity
"Most people agree that executive pay should reflect their firm’s progress on diversity … [and] measuring financial performance objectively is pretty straightforward," but rewarding inclusion can be subjective, says Chris Hughes in a Bloomberg article.
Environmental, social and governance (ESG) metrics are reflected in executive pay plans in the US, says Hughes, and "there’s evidence that firms with a higher ESG score perform better as they benefit from a lower cost of capital". Movements such as #MeToo and Black Lives Matter have also increased emphasis on how well a company’s workforce represents wider society. For example, the "Carlyle Group recently divided US$2m between around 50 employees in recognition of actions that supported diversity in the buyout firm or its funds’ portfolio investments", he writes.
How to incentivise and measure success for advancing diversity in general isn’t clear cut, though, says Hughes. According to Xavier Baeten, professor of reward and sustainability at the Vlerick Business School, the financial incentives approach in ESG is too narrowly based on quantifiable measures largely due to distrust by investors towards a boards’ ability to evaluate pay. "An all-encompassing evaluation is what’s needed," writes Hughes, and the assessment must be "largely subjective and against a mix of qualitative and quantitative inputs".
"For senior executives, the realistic approach is for the board to start by considering the company’s overall sustainability goals, diversity included, and form a view as to how the leadership has performed against them," he says. This could encourage process improvements, such as recruitment and measuring staff progression, that will make a difference. "Improving diversity in corporations starts with establishing the right incentives at the top. That will require investors to cut some slack to board members who set executive pay — frequently the villains of the shareholder voting season," concludes Hughes.