Pax Ellevate Management, investment adviser to the Pax Ellevate Global Women's Index Fund, has filed a rulemaking petition with the Securities and Exchange Commission seeking a requirement that companies disclose gender pay ratios on an annual basis. In the alternative, the SEC is urged to provide guidance to companies regarding voluntary reporting of pay equity ratios to their investors.
“We believe that pay equity is a useful and material indicator of well managed, well-governed companies, and conversely, that companies exhibiting significant gender pay disparities may bear disproportionate risk, and that investors therefore may benefit from having such information,” the firm wrote, describing gender pay inequality as a material risk to investors.
Among the risks for company and investor alike are gender discrimination lawsuits. Although usually settled out of court, many of these lawsuits, particularly class actions, can be quite costly, and the time and expense involved in defending against them can be substantial. “More generally, companies that do a poor job of retaining and motivating their workforces can be at a distinct competitive disadvantage,” the petition says.
The petitioners draw parallels to the SEC’s recent pay ratio rule and ongoing efforts to advance diversity on boards of directors.
As investor interest in gender diversity has grown, companies are increasingly reporting on executive and board diversity, the fund says. The SEC has issued guidance to companies in its amendments to item 407(c) of Regulation S-K, requiring disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director. Also, the Dodd-Frank Act required the SEC to issue a rule requiring public companies to disclose a comparison of CEO pay to that of the median employee.
“While neither the new pay ratio rule nor Reg. S-K specifically addresses gender pay disparity, the logic behind the disclosure of both is the same: companies that discriminate against any class of employees, or allow large pay disparities to exist among classes of employees, bear increased regulatory, litigation and reputational risk,” the petition says.The new SEC rule on pay ratio disclosure already obliges companies to collect the data that would be needed to report
As for the question of whether gender pay ratios fall within the definition of materiality, the petition references the SEC's Staff Accounting Bulletin No. 99. “A matter is material if there is a substantial likelihood that a reasonable person would consider it important,” that guidance says.