Companies Required to Disclose Diversity Policy under New EU Rule

The European Union Council has come up with a directive requiring companies to disclose non-financial information, including diversity policies.

Under the EU Council’s directive entitled Disclosure of non-financial and diversity information by certain large companies and groups, large public interest entities with employees exceeding 500 are instructed to submit a yearly report on their diversity policies and other non-financial matters, including environmental, social and employee-related affairs plus observance of human rights and anti-corruption and bribery matters.

It is expected that the rule will apply to the majority of FTSE 350 companies in the UK as well as some AIM companies, privately-owned corporations and financial institutions that are not listed.  Small medium enterprises (SMEs), however, are excluded from compliance.

The diversity report to be submitted by an organisation need not cover its entire workforce but should include a statement of the objective and description of its diversity policy pertaining to administrative and management bodies. Among the details to be reported are age, gender, and educational and professional backgrounds. The report should also discuss how the policy was implemented and how it affected the organisation.

Companies who have not applied diversity policies, however, may discuss in their reports the underlying reasons behind their lack of implementation. The directive also allows companies to opt-out of the reporting requirement if doing so is seriously prejudicial to their interest.

The plan to enact the directive dates back to 2011. After going through a number of revisions, the final draft of the directive was approved by the EU Council on April 15, 2014.

The requirement on disclosing diversity policy is primarily intended to prevent the dire effects of “group-think.” The Council pointed that a company with similarly aged board members of the same gender and coming from the same geographical, educational and professional background may make unchallenged and narrow management decisions. Financial experts say that “group-think” may have contributed to the financial crisis that has plagued the globe recently.

The EU observed that majority of companies in Europe lack diversity among its board membership. With the required disclosure, the EU is confident that participating companies will experience benefits brought about by diversity, such as, increased creativity and innovation when it comes to solving issues and improved employee relations.

Companies who disclose diversity information are also more attractive to investors compared to non-transparent organisations. In a survey conducted by Eurosif/ACCA, 90% of investors said they would like to know information on a company’s diversity policy and consider such non-financial information as an important factor in their decision-making process.      

The directive will need to be transposed into a law in the UK. However, experts said that it will be a complement to the narrative rules that the UK is already implementing.     


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