Diversity in decision-making: PRA reminds firms of its rules

The PRA recently published a letter addressed to Board Chairs of banks, Solvency II insurers, and certain other significant firms to remind them of the PRA’s rules relating to diversity in decision-making.

Rules on diversity

The letter highlights the requirements of the PRA Rulebook that:

• Such firms engage a “broad set of qualities and competencies when recruiting to the management/governing body” and “put in place a policy to promote diversity of the management body”.
• Significant banks and investment firms, that are required to have a nominations committee, “[decide] on a target for the representation of the underrepresented gender in the management body”.
• Firms subject to the above requirements explain on their website how they comply with the respective requirements.

European Banking Authority reports on benchmarking of diversity practices

The letter also references the publication, last month, of the European Banking Authority’s (“EBA”) report on the benchmarking of diversity practices which found that 70.48% of the UK banks and investment firms sampled during 2018 have a policy in place promoting diversity on the management body.

This latest communication from the PRA mirrors an earlier letter from the PRA of August 2016 which stressed the same points in reaction to an earlier EBA report which found that only 15.46% of the equivalent UK firms surveyed during 2015 had such diversity a policy.

Mixed signs of progress and looking ahead

The delta between these findings from the two EBA reports shows a significant improvement in boardroom diversity policies since 2015 and is reflective of the increasing attention accorded to boardroom diversity in the wider market. Recent examples of this include a commitment by a major bank to only underwrite IPOs in the US and Europe of private companies that have at least one diverse board member.

There is clearly still progress to be made, however, with a report last year for the Financial Reporting Council finding that only 6% of FTSE 250 companies had fully complied with Provision B.2.4 of the then-current 2012 UK Corporate Governance Code which required nomination committees to give an account of their board appointments process, including “a description of [such committee’s] policy on diversity, including gender, any measurable objectives that it has set for implementing the policy, and progress on achieving the objectives”. This requirement has been replaced by a similar one at Provision 23 in the current UK Corporate Governance Code.

Diversity in decision-making remains a key area of focus for the PRA and the PRA’s most recent letter should be read as a reminder to firms that while there have been improvements since 2015, there is still more to do.  In addition, firms should note that whilst gender equality is one key element of diversity (and one which is increasingly measured and scrutinised), it is not the only element.  The PRA letter refers to the need for “diversity of experience and capacity” which encompasses a wider set of characteristics and approaches beyond just gender diversity including age, ethnic, educational and social background.  It will be interesting to see what steps firms take to embrace all these elements to make management bodies truly diverse and reflective of the societies in which they operate.  It will also be interesting to see what further steps the PRA (and other regulators) take to ensure that this is happening in practice beyond reminding firms of the desirability of better decision making and avoiding “groupthink”.