FRC: Navigating barriers to senior leadership for people from minority ethnic groups in FTSE 100 and FTSE 250 companies
On September 29, 2022 the Financial Reporting Council (FRC) published a report based on the results of research that looked at the challenges and opportunities that minority ethnic individuals might experience in progressing to the boards of FTSE 100 and FTSE 250 companies. The report shows that, while there are still significant challenges to be addressed, the need for change has been taken seriously across the spectrum, including senior managers, executive leaders, board chairs and executive search consultants.
The research involved interviews and focus groups with people in a range of senior positions in FTSE 350 companies, including chairs and non-executive directors (NEDs), as well as executive search consultants. It also involved a review of annual reports from 25 FTSE 100 companies and 38 FTSE 250 companies to assess the reporting of the breadth and depth of initiatives in place to diversify senior leadership, highlighting differences between the two groups where relevant.
As well as setting out key findings in all these areas, the report sets out a number of key recommendations, including the following:
Recommendations from interviews and focus groups on dismantling barriers to progression and implementing good practice
- Be transparent – The report recommends greater transparency in decision-making and promotion processes. Companies should review all processes and policies to ensure transparency in decision-making involving selection, promotion, and performance reviews especially at middle management to senior levels. This should include a critical analysis of all criteria, ensuring they are all necessary and relevant and can be consistently applied, followed by monitoring of decisions taken against these criteria.
- Embed data and build in accountability - Much greater emphasis should be placed on data analytics. Among other things, the organisation’s equity goals (not just headline company targets, but specific goals across the talent management cycle including recruitment, progression, and retention) should be embedded into the business strategy, alongside all other business goals, and cascade down into individual objectives. The performance of all leaders and people managers should be assessed against these goals.
- Boost trust - Trust should be nurtured and boosted within organisations and between individuals. For example, at an organisational level, companies should introduce targeted training programmes that involve multiple stakeholders (not just minority ethnic individuals) to co-create a culture of fairness and psychological safety for all employees and develop understanding of concepts such as intersectionality. At interpersonal levels, opportunities should be created for developing relationships and stronger and more inclusive networks throughout the organisation.
Recommendations from review of annual reports
- Reporting on targeted programmes should be linked to specific diversity objectives with expected outcomes and include data showing evidence of impact.
- Reporting on diversity and inclusion (D&I) governance should provide information on the structure, composition and specific function of D&I focused committees and taskforces and should explain how they will provide the data required to understand their effectiveness in diversifying senior leadership and the best design and approach to achieve this.
- Specific objectives and the rationale for the race action plan, and an evaluation of actions and initiatives already conducted as part of the plan, could be included in the annual report to assess effectiveness of such interventions.
- Companies are reporting a wide range of public objectives including their targets, pay gaps and performance metrics but reporting could be further enhanced by clearly outlining the initiatives or measures being taken as part of a broader strategy to meet such objectives.
- All FTSE 350 companies should analyse the data on the diversity and demographic makeup of their boards. This analysis should be used to justify, where required, their intentional, positive action recruitment, succession planning, and talent mapping initiatives that bring the right technical skills coupled with the required level of diversity to increase ethnic minority representation at board level.
- When reporting on charters, external validation and benchmarking, companies should make a clearer link between their broader strategic diversity objectives and the initiatives that they are undertaking as part of the commitments outlined in the charter(s) they have signed up to.
- Companies should report on the design and approach of their data collection campaigns to share good practice and support other organisations in capturing this fundamental information. Reporting could be improved by providing parameters for taking action on findings, such as under representation in specific areas or levels of the business or reporting on the actions and initiatives that the company intends to take should they capture sufficient diversity data or measure suboptimal levels of diversity.
- The quality of reporting would be enhanced by describing the process by which other initiatives can support the company to meet specific diversity objectives. For example, when reporting on training, reporting could be enhanced by including information on the design, content, or impact of the training in helping to diversify senior leadership.
(FRC: Navigating barriers to senior leadership for people from minority ethnic groups in FTSE 100 and FTSE 250 companies, 04.10.2022)
English Supreme Court delivers landmark judgment on directors’ duties when a company faces insolvency
Why is the decision important?
For the first time, the Supreme Court has considered whether there is a common law duty on directors to act in the interests of creditors when a company faces insolvency, but is not yet in an insolvency process (the so-called twilight zone) (the Creditors’ Duty). Unanimously agreeing that such a duty does exist, the judgment provides important guidance on when that duty arises and what it requires of directors.
What were the facts?
In 2009, a company, AWA, paid a substantial dividend of nearly all its net assets to its parent company, Sequana (the respondent). The company existed to pay a future environmental liability (the exact amount of which was unknown, and therefore a contingent liability) in respect of pollution clean-up costs. The dividend was paid in accordance with the Companies Act 2006 and the company was solvent at the relevant time.
Several years later it became clear that the cost of meeting the environmental liability was much greater than anticipated and AWA entered administration. Eventually the appellant, BTI 2014 LLC, took an assignment of AWA’s claim to recover from the directors an amount equivalent to the dividend. The Court of Appeal gave judgment in 2019, agreeing with the High Court that the dividend was lawful. The Court of Appeal commented on the Creditors’ Duty and when it would be engaged. On the facts of the case the Court of Appeal considered that the Creditors’ Duty was not engaged at the time that the dividend was paid.
What do I need to know?
The Supreme Court unanimously dismissed the appeal, finding that the Creditors’ Duty had not been triggered and therefore the dividend was lawful. There are five different judgements from the Justices, the leading judgment being given by Lord Briggs. The judgments agree on some points and not on others. Although the decision intentionally leaves some issues unresolved, the law has been clarified in some key respects:
- The Creditors’ Duty was confirmed.
- The Supreme Court set out a different formulation of the Creditors’ Duty in the twighlight zone. The Justices say that the duty is engaged later than was suggested by the Court of Appeal. The test is not merely when there is a real and not remote risk of insolvency. The trigger is now later.
- Directors must consider the interests of creditors when:
- the company is insolvent on a balance sheet basis or is unable to pay debts as and when they fall due and therefore insolvent on a cashflow basis.
- the company is bordering on insolvency
- insolvent liquidation or administration is probable, or
- the particular transaction would create one of the above situations.
- That Creditors’ Duty is a modification of the statutory duty to act in good faith and promote the success of the company under section 172 of the Companies Act 2006. It exists at common law and is distinct from directors’ liabilities in relation to wrongful trading and unlawful preferences under the Insolvency Act 1986.
- The Creditors’ Duty is not owed to creditors direct (nor is the duty to act in the company’s interests owed to members direct) and it is a duty to consider creditors’ interests as a whole.
- As soon as the duty arises, directors should have regard to creditors’ interests but creditors’ interests do not become paramount until insolvency is inevitable.
- Until such time as insolvency is inevitable, directors must balance the interests of members and creditors. This will mean giving more weight to creditors’ interests the closer to insolvency the company becomes.
- The balancing exercise (between members’ and creditors’ interests) is a sliding scale and not a cliff edge, as had been proposed by the Court of Appeal. Once engaged, the duty is not owed exclusively to either group, at least until insolvency is inevitable.
- Members cannot ratify a breach of the Creditors’ Duty. This is because shareholders cannot authorise or ratify a transaction which would jeopardise the company’s solvency or cause loss to its creditors.
- The Creditors’ Duty can apply to directors resolving to pay a dividend that would otherwise be lawful. In other words, the Creditors’ Duty is an additional obligation so that even if a company is solvent and there are distributible reserves for the pusposes of Part 23 of the Companies Act 2006, a dividend could still constitute a breach of the directors’ duties. The remedy in that case would be equitable and at the court’s discretion.
What should directors do if a company is facing insolvency?
There are many practical steps that directors should consider taking. In her judgment, Lady Arden emphasises the importance of directors staying informed, maintaining up-to-date accounting information, and ensuring they are alerted if cash/asset reserves deplete so that creditors risk not being paid.
Directors should always take careful notes of decisions taken and the reasons for them. It is always prudent to seek professional advice promptly. Directors’ duties - and the risk of potential liabilities - is an evolving, complex area of law. Engaging advisers at the earliest opportunity provides the best opportunity of rescuing the company and of directors avoiding liability. Any member of our financial restructuring and insolvency team would be happy to discuss this further.
(BTI 2014 LLC v Sequana SA and others [2022] UKSC 25)
