One of the key areas we evaluate is how well companies are prioritising governance, with diversity and Board skills taking centre stage.
In our examination of ESG strategies, we observed a surprising disparity in the attention given to governance-related ESG issues compared with climate change and social factors. Governance often encompasses business ethics and diversity at the Board level. While many companies extensively discussed their culture and values, we found varying degrees of detail regarding how the Board establishes and monitors these cultural aspects. This ranged from comprehensive explanations and metrics to high-level overviews or no information at all.
Recent corporate failures, including the Carillion case, have prompted the UK Government to propose reforms aimed at restoring trust in audit and corporate governance. These reforms target directors’ responsibilities, internal control, risk management, audit, corporate reporting, ESG oversight, and executive pay transparency. Interestingly, only a small percentage of companies in our sample had set specific timebound targets to increase Board skills in areas such as environmental, social or cyber domains.
Nevertheless, all companies acknowledged the significance of ESG issues, particularly climate change and talent attraction, as substantial business risks. They provided detailed information about the roles and responsibilities of their Boards and management in addressing these issues. Moreover, the majority had either integrated ESG-related metrics into executive remuneration or were considering doing so, reflecting a positive trend toward enhanced disclosure.
Nearly all companies mentioned a Code of Conduct, often linking it to their culture and values. Supply chain management also received considerable attention, with most companies explaining their supply chain due diligence and featuring a Supplier Code of Conduct.
While many companies in our sample set targets to increase diversity at the Board level, compliance with existing diversity requirements, particularly those set by the FCA for gender representation, varied. Some aimed to achieve targets by 2025, but it’s crucial to note that listed companies are expected to comply sooner. Notably, nearly half of the companies had a female Chair, CEO, CFO or Senior Independent Director. However, some did not mention this requirement at all. On a positive note, the majority had at least one Board member from an ethnic minority background.
In contrast to the broader workforce, most companies in our sample were compliant with the FCA and Parker Review targets for ethnic diversity on the Board or exceeded them. Information about age, nationality and sexual orientation was limited, but we anticipate improvements as companies comply with new FCA requirements for numerical tables displaying gender and ethnic diversity at the Board and executive management levels.
Regarding skills diversity, our analysis revealed mixed results. Although all companies commented on Board skills, approximately one-quarter lacked a dedicated skills matrix, and the skills listed in the matrix often did not align with those in the Board spread. Emerging skills such as ESG or cyber were particularly underrepresented.
Surprisingly, these skills were sometimes considered less important. While some companies reported a lack of these skills, few had plans to increase them. It’s important to note that investors expect Boards to possess the necessary skills for sustainability and technology transitions and can voice their views through voting. Addressing these skill gaps is crucial for companies.
Best-practice considerations
- Familiarise yourself with the FCA and Parker Review targets for Board diversity.
- Link your diversity and inclusion strategy to succession planning.
- Evaluate emerging Board skills and consider boosting them.
- Explain how your Board monitors culture and use external metrics to do so.
- Consider the proposed changes to the UK Corporate Governance Code, including responsibilities of the Board and Audit Committee for sustainability and ESG reporting.
At our launch event on 19 July, Luminous’ Stephen Butler, Investor Engagement & ESG Disclosure Director, Rachel Madan, Sustainability & Impact Director, and Nina Kefer, Senior Consultant, IE & ESG Disclosure, along with Jonathan Labrey, Chief Connectivity and Integrated Reporting Officer, IFRS Foundation, shared the outcomes of our proprietary research. They also offered practical advice on how companies can integrate ESG, bring their equity story to life, communicate their purpose and culture, and much more.
If you would like to access the recording, slides or transcript from our event, please get in touch.
