The U.S. House of Representatives on Tuesday approved H.R. 5084, which would amend the Securities Exchange Act of 1934 to require publicly traded corporations to disclose diversity information about their boards of directors, nominees for the boards, and executive officers of the corporation. The bill, introduced on Nov. 14 by Rep. Gregory Meeks (D-N.Y.) and cosponsored by Reps. Carolyn Maloney (D-N.Y.), Emanuel Cleaver (D-Mo.), David Scott (D-Ga.), and Gilbert Ray Cisneros Jr. (D-Calif.), would also require the Securities and Exchange Commission to report annually to Congress an analysis of diversity trends. The SEC would also have to establish a Diversity Advisory Group to work on initiatives to increase gender, racial, and ethnic diversity on corporate boards. If the bill does become law, the SEC Office of Minority and Women Inclusion would also be tasked with publishing best practices for compliance with disclosure requirements on diversity.
The bill, called the “Improving Corporate Governance Through Diversity Act of 2019,” is “the culmination of years of work dedicated to increasing transparency so that the highest levels of corporate America can begin to reflect the diversity of America,” said Rep. Meeks when the House passed it.
Under the bill, the data in diversity disclosures would be based on voluntary self-identification of race, ethnicity, and gender.
Lack of board representation
A white paper issued by Institutional Shareholder Services (ISS) earlier this year noted just 10 percent of current board members in Russell 3000 companies belong to ethnic minority groups, although 15 percent of new directors are minorities. In 2019, 45 percent of new board seats were filled by women (compared to 12 percent back in 2008), but just 19 percent of all seats are held by women, according to “U.S. Board Diversity Trends in 2019.” The report noted gender diversity in some measure got a boost thanks to 2019 regulations in California requiring boards headquartered there include at least one female.
“To the extent that diversity of any kind improves a company’s ability to increase corporate value—by, for example, deepening the board’s understanding of its customer base or introducing new ideas that a more externally homogeneous board might have missed—it is an eminently reasonable issue for consideration by anyone interested in a company’s welfare.”
Hester Peirce, Commissioner, SEC
“While the trend of increasing ethnic diversity on boards is visible, the rate of change is considerably slower than the trend in board gender diversity,” wrote the author of the ISS report, Kosmas Papadopoulos, CFA at ISS Analytics.
“Studies have shown that the lack of diversity in C-suites and corporate boards is not only an injustice, it is a detriment to business and a hindrance to innovation,” Meeks said. Improving board diversity “will make companies more accountable to the public and to the economy and improve their financial performance,” he explained.
Is everyone on board?
Speaking at the Society for Corporate Governance national conference earlier this year, SEC Commissioner Hester Peirce said, “To the extent that diversity of any kind improves a company’s ability to increase corporate value—by, for example, deepening the board’s understanding of its customer base or introducing new ideas that a more externally homogeneous board might have missed—it is an eminently reasonable issue for consideration by anyone interested in a company’s welfare.” At the same time, she maintained “there is mixed evidence as to whether the mere inclusion of women on boards has an effect on a company’s performance.”
The House bill, which Meeks had just introduced on Nov. 14, “earned broad bipartisan support across civil rights groups, corporate America, and investors alike,” Meeks said. The House approved the bill by a vote of 281 to 135 (with 14 not voting). Voting in favor of the legislation were 226 Democrats and 55 Republicans. One independent and 134 Republicans voted against the bill.
Congress has the authority to enact this legislation pursuant to its Article 1 Commerce Clause powers, according to Meeks.
Sen. Robert Menendez (D-N.J.) introduced a bill in the Senate on improving corporate governance through diversity in February of this year. Sens. Kamala Harris (D-Calif.) and Cory Booker (D-N.J.) are cosponsors of the bill, a.k.a. S. 360. The Senate bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
Meeks said he looks forward “to working together with the Senate” to get the legislation passed.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.