Insights

Diversity has been a recurrent governance topic in the past years in both the regulated world and the listed entities’ sphere, apart from being one of ESG aspects under the spotlight.  Diversity is generally thought of in terms of aspects such as gender, ethnicity, age, demographic or socioeconomic backgrounds. More importantly, it is about ‘diversity of thought’ or ‘cognitive diversity’, that is, having a group of people with different experiences, knowledge, attitudes and backgrounds which can offer different perspectives and enrich the Board and Management through more holistic discussions, independent opinions and constructive challenging in the process of decision-making.

A 2020 report of the European Banking Authority (“EBA”) reports that only 8% of CEOs of European credit and investment institutions are women and only around a fifth of the positions in the management bodies of Europe’s largest banks are held by women. It was also noted that less than two-thirds of European banks have a diversity policy despite the requirement for such a policy.^[1]  Against the background of this report, Frank Elderson, Vice-Chair of the Supervisory Board of the ECB and Elizabeth McCaul, member of the Supervisory Board of the ECB contend that although the journey towards diversity seems to be picking up speed, there are quite a few milestones to reach. They comment that “the European banking landscape is beginning to include more women, but progress is still too slow.” ^[2]

Within the context of the internal governance of banks, the EBA has constantly emphasized the need to leverage diversity for a better and richer management body.^[3] The EBA Guidelines on Internal Governance (EBA/GL/2021/05) (the “IG Guidelines”) and the joint European Securities and Markets Authority (“ESMA”) and EBA Guidelines on the assessment of the suitability of members of the management body and key function holders (EBA/GL/2021/06) (the “Suitability Guidelines”) as revised with effect from the 31 December 2021, both place specific emphasis on gender diversity and balance.

Replicated locally in the MFSA Banking Rule 24, the IG Governance introduce two complementary provisions which may require institutions to review or update their codes and policies:

• The “no discrimination rule”: Institutions are to ensure that there is no discrimination of staff based on gender, race, colour, ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation; and
• Gender-neutral policies: This includes, not limitedly, remuneration, recruitment policies, career development and succession plans, access to training and ability to apply for internal vacancies. Institutions should ensure equal opportunities for all staff independent of their genders, including with regard to career perspectives and aim to improve the representation of the underrepresented gender in positions within the Board and Executive Management as well as in the group of staff considered as material risk takers (“identified staff”).^[4]

The IG Guidelines indicate that these measures are separate from other obligations relating to gender pay such as the fact that institutions should monitor the development of the gender pay gap^[5] separately for identified staff, members of Executive Management, members of the Board and other staff.  This is addressed in the EBA Guidelines on sound remuneration policies under Directive 2013/36/EU (EBA/GL/2021/04), likewise revised as from 31 December 2021 in line with CRDV and locally included in the MFSA Banking Rule 21.

Diversity has always been one of the factors to be considered when selecting and assessing members of management bodies and the 2017 Suitability Guidelines had stressed the importance of a gender-balanced composition of the management body.  The revised version of the Guidelines goes one step further by calling upon institutions to ensure an appropriate representation of all genders within the management body and that the principle of equal opportunities is respected when selecting members of the management body, without setting out a minimum representation threshold. Against this background, one should also keep in view the disclosure obligation imposed on significant banks contained in Article 435(2)(c) of the CRR^[6] regarding the publication of the target for the representation of the underrepresented gender in the board of directors and the implementation of the policy on how to increase the number of the underrepresented gender in the board in order to meet that target.^[7]

The relative provisions in the Suitability Guidelines are aimed at fostering a more gender-balanced composition and generally a more gender-balanced pool of candidates for positions within the Board and Senior Management and these are considerations which need to be included within a bank’s Board and Senior Management diversity policy.  Similarly, the diversity policy for staff needs to address career planning aspects and measures to ensure equal treatment and opportunities for staff of different genders. Banks are therefore called upon to ensure that appropriate gender representation is taken into account when selecting staff for management positions as well as when providing management training.

There is no doubt that gender balance and diversity in general as well as inclusion have become and will continue, more than ever, to be critical components of the financial services sector regulatory framework. The key consideration in measures such as those within the EBA Guidelines appears to be a correlation between insufficient diversity and groupthink, with the ultimate goal being a safer and sounder industry through better internal governance.

[1] EBA report on the benchmarking of diversity practices at European Union level under ARTICLE 91(11) OF DIRECTIVE 2013/36/EU (2018 DATA)

[2] ECB Banking Supervision seeking greater diversity within banks

[3] Throughout this article, unless otherwise, stated “management body” shall mean the Board of Directors and Executive or Senior Management.

[4] Commission Delegated Regulation (EU) 2021/923 of 25 March 2021 supplementing Directive 2013/36/EU of the European Parliament and of the Council with regard to regulatory technical standards setting out the criteria to define managerial responsibility, control functions, material business units and a significant impact on a material business unit’s risk profile, and setting out criteria for identifying staff members or categories of staff whose professional activities have an impact on the institution’s risk profile that is comparably as material as that of staff members or categories of staff referred to in Article 92(3) of that Directive

[5] Gender pay gap means the difference between the average gross hourly earnings of men and women expressed as a percentage of the average gross hourly earnings of men.

[6] Regulation (EU) No 575/2013 of the European Parliament and the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012

[7] See also para. 103 of the IG Guidelines and para. 86 of MFSA Banking Rule 24.