In the coming weeks, the Securities and Exchange Commission will revisit its existing requirement to disclose board-level diversity and a new rule could be on the horizon.
“Diversity on boards, and in organizations more generally, is very important to me and I have not shied away from expressing my strong views on the topic,” SEC Chair Mary Jo White said this week during a speech at the International Corporate Governance Network’s annual conference in San Francisco. “I have seen first-hand what the research is telling us—boards with diverse members function better and are correlated with better company performance. This is precisely why investors have—and should have—an interest in diversity disclosure about board members and nominees.”
The SEC does not have the authority to mandate board diversity, but, in 2009, it adopted a rule requiring companies to disclose whether, and if so, how their nominating committees consider diversity. If they have a policy on diversity, companies are asked to detail how its effectiveness is assessed. The rule did not define diversity and the adopting release made clear that there was no single way required to define the term. Instead, the determination was left to companies.
How has the rule worked? Not very well, White says.
“Companies’ disclosures on board diversity in reporting under our current requirements have generally been vague and have changed little since the rule was adopted,” she said. “Very few companies have disclosed a formal diversity policy and, as a result, there is very little disclosure on how companies are assessing the effectiveness of their policies. Companies’ definitions of diversity differ greatly, bringing in life and work experience, living abroad, relevant expertise and sometimes race, gender, ethnicity, and sexual orientation. But these more specific disclosures are rare and, not surprisingly, there are investors who are not satisfied.”
Better news, according to White, is that a growing number of company proxy statements have recently started voluntarily providing an analysis of data, accompanied by pie charts and bar graphs, to describe the state of the board’s gender, race and ethnic diversity composition, sometimes in addition to other categories.
In January, White directed the SEC staff to review the existing rule. It is currently preparing a recommendation to propose amending the rule to require companies to include, in their proxy statements, more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.
“Some may oppose even minimally more prescriptive diversity disclosure requirements,” White said. “My view is that the SEC has a responsibility to ensure that our disclosure rules are serving their intended purpose of meaningfully informing investors. This rule does not and it should be changed. Our lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors.”
In April 2015, nine of the nation's largest public pension funds, which collectively supervise the investment of over $1.12 trillion in assets, petitioned the SEC for additional disclosure requirements related to corporate board diversity. In a joint letter to the Commission, the funds urged the SEC and its commissioners to adopt a rule requiring corporate disclosure of board nominees’ gender, racial, and ethnic diversity, as well as their “mix of skills, experiences, and attributes.”
That proposal seeks to expand upon current Regulation S-K requirements that registrants identify the minimum skills, experiences, and attributes that all board candidates and nominees are expected to have. Because Rule S-K does not define diversity, some companies “have used such broad definitions of diversity that the concept conveys little meaning to investors,” the letter says.
The requirement currently reads: “Describe any specific minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee for a position on the registrant’s board of directors, and describe any specific qualities or skills that the nominating committee believes are necessary for one or more of the registrant’s directors to possess.”
The pension funds' proposal would add an additional sentence: “When the disclosure for this paragraph is presented in a proxy or information statement relating to the election of directors, these qualities, along with the nominee’s gender, race, and ethnicity should be presented in a chart or matrix form.” This data, according to the plan, would be presented in XTML or other electronic formats that allow it to be easily aggregated.
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