by Hannah Biggins, Michelle Bennett, Alexander Batsis and Yan-Lin Lee · 26 March 2024
Requirements to ensure diversity and inclusion strategies are fit for purpose
Directors must exercise their duty of care and diligence when reviewing and approving the company's annual report, which includes any diversity and inclusion (D&I)-related disclosures it contains. As with other forms of disclosure, false, misleading or exaggerated claims or statements regarding D&I matters may result in a breach of directors' duties, or may constitute misleading or deceptive conduct under the Corporations Act, the ASIC Act, or the Australian Consumer Law (this conduct is also known as 'bluewashing'). Such claims or statements may give rise to complaints, regulatory enforcement actions, litigation, reputational damage and other consequences.
In Australia, the main D&I-related regimes are contained in:
- discrimination, employment and human rights-related laws; and
- Workplace Gender Equality Act 2012 (Cth) (the WGE Act),
and for Australian Securities Exchange (ASX) listed companies:
- the ASX Corporate Governance Council's (the ASX Council) Corporate Governance Principles and Recommendations 2019 (4th Edition) (the ASX Principles).
A number of Australian companies have also voluntarily adopted 'soft law' frameworks, such as the UN Sustainable Development Goals (which include 'gender equality' and 'reduced inequalities') as benchmark objectives when measuring and reporting on progress regarding D&I.
What are some of the key requirements for managing, and reporting against, D&I-related matters within the organisation?
In late 2022, amendments were made to the Sex Discrimination Act 1984 (Cth), which imposed on businesses a positive duty to eliminate — as far as possible — certain unlawful behaviour, including discrimination on the grounds of sex, and sexual harassment. The positive duty aims to create change by preventing workplace sex discrimination and sexual harassment from happening, rather than responding to them after they have occurred. Since 12 December 2023, the Australian Human Rights Commission has been granted new powers to investigate and enforce compliance with the positive duty.
The ASX Principles require listed entities to report on how they follow each of the current 4th edition of the ASX Council's recommendations regarding corporate governance practices (or give an 'if not, why not' explanation for not following a certain recommendation). Relevant to D&I, recommendation 1.5 of the ASX Principles states that a listed entity should:
- have and disclose a diversity policy and set measurable objectives for achieving gender diversity in its board, senior executives and workforce generally, and report on its progress towards achieving those objectives;
- disclose certain metrics around the respective proportions of men and women on the board, in senior executive positions and across the whole workforce; and
- if within the S&P/ASX300 at the commencement of the relevant reporting period, have a measurable objective for achieving gender diversity in its board of not less than 30% of its directors of each gender within a specified period.
In commentary to recommendation 1.5, the ASX Council suggests that listed entities consider setting key performance indicators (KPIs) for senior executives on gender participation within their areas of responsibility, and linking part of their remuneration to achieving those KPIs. The commentary to recommendation 2.1 (regarding nomination committees) also encourages listed companies to maintain a diverse nominations committee in order to reduce the risk of 'groupthink'.
The WGE Act requires certain non-public sector employers to submit an annual report to the Workplace Gender Equality Agency, which must have (among other things) details regarding the gender composition of the workforce and the board, pay parity between women and men, and the availability and utility of employment terms, conditions and practices relating to flexible working arrangements for employees. Failure to comply with the WGE Act may result in the employer being named in a report provided to the relevant Minister.
The WGE Act was amended in early 2023. As a result:
- in February 2024, the WGE Agency will publish the first private sector employer gender pay gaps (in addition to its existing publication of the gender pay gap at a national, industry and occupational level); and
- from 1 April 2024, employers will be required to report additional workforce data (eg age, primary workplace location and remuneration of certain employees including the CEO); and
- from 1 April 2024, employers with 500 or more staff must have a policy or strategy for each of the six gender equality indicators.
What are the risks to be aware of?
From a reporting perspective, directors must exercise their duty of care and diligence when reviewing and approving the company's annual report, which includes any D&I-related disclosures it contains. In particular, directors should carefully consider any forward-looking D&I-related disclosures (eg reaching a gender or racial diversity target within a specific period). They should test and challenge management to ensure that there are reasonable grounds (such as a credible action plan to implement and achieve a D&I-related target) for making the relevant disclosures before they are published (such as a credible action plan to implement and achieve a D&I-related target) and oversee progress towards any applicable future commitment or target.
There is increasing pressure on companies from shareholders and other stakeholders, advocating for greater progress in relation to D&I and, in particular, for more diversity on boards (see the proposed changes to recommendation 2.3 of the ASX Principles discussed below). Failing to have an appropriate D&I strategy in place can attract scrutiny by shareholders and other stakeholders. We have seen a range of stakeholders, such as superannuation funds, investment managers and proxy advisers, adopting D&I-related voting policies, to advocate for stronger action on D&I within their investee companies. For example, the Australian Council of Superannuation Investors maintains a policy that it will recommend to its members (which includes some of Australia's largest superannuation funds) to vote against the election or re-election of a male director on ASX300 boards that have less than 30% female representation.
What is next for boards?
On 27 February 2024, the ASX Corporate Governance Council published the Consultation Draft for a fifth edition of the ASX Corporate Governance Principles and Recommendations (the Consultation Draft), which includes (among other things) updated and new D&I-related recommendations.
As part of the proposed fifth edition, a new ASX Recommendation 2.3 will be inserted, which provides that, if a board is considering any relevant diversity characteristics (beyond gender) for its board membership, it should disclose those diversity characteristics. The Consultation Draft proposes specific parameters for reflecting diversity on the board, differing from the 4th Edition. For entities in the S&P/ASX 300 Index at the commencement of the reporting period, gender diversity is defined as a balanced board (at least 40% women / 40% men / up to 20% any gender). Refer to our earlier Insight for more information regarding board diversity reporting.
Under recommendation 3.4, the Consultation Draft also seeks to extend the scope of Recommendation 1.5, to require a diversity and inclusion policy (compared to just a diversity policy). It introduces a new mandate for entities to disclose the effectiveness of their diversity and inclusion practices, considering measures against sex-based harassment and discrimination. The commentary in the Consultation Draft also broadens the meaning of diversity characteristics to encompass relationship status, family and caring responsibilities, inter-sex status, and race.
We recommend that boards:
- consider the new abovementioned Consultation Draft of the ASX Principles and how the company can prepare to implement these (subject to any changes as part of the consultation process);
- ensure the company's existing D&I-related strategy remains fit for purpose - for non-public sector employers captured under the WGE Act, if the employer has 500 or more staff, the strategy should (from 1 April 2024) include a policy for each of the six gender equality indicators;
- oversee implementation of the D&I related strategy and policy, including that it is embedded in the company's broader strategy;
- maintain focus on the company's D&I-related obligations, and guide management on these matters as required;
- have a firm understanding of the company's existing D&I-related disclosures, targets, frameworks, policies and procedures (including regarding board composition), especially in light of the fact that proposed entities will need to form a view
and disclose the effectiveness of its diversity and inclusion practices; and - seek regular reports from management, so as to progress in line with the company's strategy and targets, and update disclosures and targets if required.
Looking internationally:
- The UK's Financial Conduct Authority (the FCA) and Prudential Regulation Authority (the PRA) are seeking proposals to accelerate change in relation to D&I in the financial sector. The key proposals include an obligation for firms to develop a D&I strategy setting out how they will meet their objectives and goals; to collect, report and disclose data against certain characteristics; and to set targets to address under-representation of certain people. Both regulators have published consultation papers setting out their proposed rules and guidance to deliver improved D&I in the sector generally, with a policy statement expected to be published during the first quarter of 2024. Australian directors (particularly in the financial services sector) should monitor these international developments — though ASIC and the Australian Prudential Regulation Authority (APRA) have not yet foreshadowed D&I-related regulatory reform in Australia, the FCA and PRA's proposals may provide some indication of the future direction.
- In April 2023, the establishment of the Task Force on Inequality-related Financial Disclosures (TIFD) signalled a shift in how companies will need to treat social-related financial risks in the future, including in relation to D&I matters. The TIFD has not indicated when it expects to release a draft reporting framework, but has stated the framework will be designed to ensure interoperability with the TCFD and the Task Force on Nature-Related Financial Disclosures (the TNFD).