Public companies with too few women on their boards will be forced to explain themselves to the City of London under new proposals meant to boost diversity, amid claims the top table of corporate Britain remains “very male and white”.
Those with fewer than two out of five female directors will be required to provide an annual statement to investors on why they have fallen short.
At least one of the key board positions of chairman, chief executive, finance director or senior independent director should also be held by a woman under the “comply or explain” rules, the Financial Conduct Authority said.
Further proposed changes to the listings regime would require companies to have at least one director from an ethnic minority background.
However the City watchdog could face accusations of hypocrisy as it fails to hit some of these benchmarks itself, given only a third of its board is female and all are non-executive directors.
The overhaul, which is under consultation, is designed to make public company leadership better reflect the make-up of the UK population. An official review led by the City veteran by Sir John Parker last year complained of slow progress on representation of ethnic minorities and recommended a quota.
There has been more progress towards better representation of women, who now account for 34pc of board positions in the FTSE 350, exceeding a one-third target set in 2016 by another official review.
However there have been concerns in recent months that progress has stalled, particularly when it comes to increasing diversity in leadership roles.
Sir Philip Hampton, co-author of the review of women on boards, said: "Comply or explain is a good principle for many governance matters and is sensible in this area.”
"Great progress has been made in non-executive roles so it's now more important to see diversity in senior executive positions. Top executives on public company boards are very male and white."
Shareholder groups are increasingly holding boards to account for a lack of female representation, telling investors in Wizz Air to oust the chairman for failing to hire enough women to the company's board earlier this month. Similar recommendations have been made this year against chairmen at AJ Bell, Aveva and Evraz.
Former JP Morgan banker Kate Grussing, who in 2019 became the first headhunter ever to help the Bank of England find a new governor after it came under pressure to find a woman for the role, said regulators should "eat their own food".
"[I'm] glad the FCA has set a more ambitious target of 40pc given the strength of the pipeline plus the women who have already established themselves as NEDs. There is no shortage of high qualified diverse talent anymore," she said. "I would expect the FCA will hold itself to the same target and as the saying goes 'eat their own food'."
The FCA defended its position by saying that its executive committee was now 60pc female.
Regulators and major banks are racing to find ways to boost diversity in the financial services industry.
Santander has decided that bankers will get bigger bonuses for hiring more women and ethnic minority staff from 2022, and more lenders are expected to follow after the FCA told the banks that it regulates that bonuses should be tied to diversity targets.
In a discussion paper published earlier this month, the FCA and the Bank of England's Prudential Regulation Authority (PRA) set out plans to boost diversity in the Square Mile, including tying bonuses to the numbers of women and ethnic minority workers that companies employ and making senior staff directly responsible for inclusion at their companies.
Meanwhile Andrew Bailey is under fresh pressure to reform the Bank of England after an internal report last week found that "unconscious bias" and "microaggressions" were holding back ethnic minority staff.
The Governor was told that minority workers suffer from “material disparities” at Threadneedle Street with non-white employees more likely to be interrupted at meetings, feel hesitant about voicing controversial views and find that others take credit for their work.
Less than 7pc of FTSE 350 board members come from non-white backgrounds, and the FCA and PRA cited research earlier this month showing representation for ethnic minorities could actually be getting worse.