New board diversity rules in UK and US heighten D&O risk: Marsh

New rules by UK and US regulators on board diversity at listed companies look set increase D&O risk with fines and legal action on the cards for those that fail to comply, warns Marsh. The broker also believes that diversity disclosures may start to influence D&O underwriting. This would potentially lead to better pricing, terms and conditions for companies that perform well on diversity. The UK’s Financial Conduct Authority (FCA) has published new rules that require listed companies to hit ethnic and gender diversity targets at board level for accounting periods staring from 1 April of this year. The rules require companies to disclose the status of their board’s diversity and inclusion efforts. The FCA wants to see women making up 40% of boards. In addition, one senior board position should be held by a woman and at least one board member should be from a minority ethnic background, excluding white ethnic groups. The new rules operate on a comply and explain basis. So, while there is not a requirement to meet these targets, companies must explain why they have not done so. Failing to comply or providing inaccurate information would expose companies to fines. The FCA move follows similar steps from the US Securities and Exchange Commission (SEC) in August last year. The SEC requires Nasdaq-listed companies to have at least two diverse directors, including one woman and one member from an underrepresented minority or from the LGBTQ+ community. These rules also operate on a comply or explain basis. Marsh’s retail client executive of management liability Zelda Pitman says the new FCA rules put additional onus on companies to be honest about their board diversity and inclusion efforts. She believes that while the new rules expose companies and their directors and officers to possible fines, legal action is, potentially, a bigger risk. “Perhaps, more significantly, disclosing a failure to meet diversity and inclusion targets may expose companies to shareholder or other action,” says Pitman. She explains that shareholder activism has increased in recent years, with a particular focus on board diversity. US courts, meanwhile, have continued to see board diversity lawsuits, although Pitman explains that so far these haven’t progressed to trial. “Recently, a derivative lawsuit against a leading software company was dismissed after the court ruled that the plaintiffs failed to prove that statements about racial diversity at the board level were knowingly misleading. The plaintiffs were unable to show a sufficiently clear and reliable statement of intent, or that a loss was caused. However, lawsuits such as this one have resulted in significant expense and negative publicity for defendant companies,” she explains. Pitman says it remains to be seen whether plaintiffs will continue to initiate these types of lawsuits, or whether the new listing rules in the UK and the US will alter their strategy. “What is clear is that this increased focus on ESG by regulators, insurers, and other stakeholders continues apace with little sign of abating and companies must be prepared to manage this risk,” she adds. When introducing its targets, the FCA said companies with diverse boards have better corporate cultures and deliver better financial performance, which makes them a better risk from a management liability perspective. And Pitman believes D&O insurers may well start using diversity disclosure information in the underwriting process to help decide on overall risk quality. “D&O underwriters are placing increasing importance on the ESG credentials of potential insureds, and this has now become an important factor when evaluating a risk…Insurers may, therefore, consider diversity and inclusion declarations when reviewing a public company’s annual report as part of the D&O insurance submission process going forward,” she says.

New board diversity rules in UK and US heighten D&O risk: Marsh

Diversity disclosure set to influence D&O underwriting

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