By Kevin A. Fritz and Kyla Miller
Seyfarth Synopsis: SEC announced they are proposing a new rule to elicit more information about the diversity of corporate board members, maintaining that the amount of minority directors at the largest public companies has “stagnated” at 15%.
The Securities and Exchange Commission (SEC), long known as “the disclosure agency” has a strong impact on corporate governance. The SEC can require public companies to provide investors with specific information to inform their investment and voting decisions. Although the SEC cannot determine who will be on the corporate board, they can require disclosure about who is serving and why they were selected.
SEC Chair Mary Jo White, speaking at a conference in San Francisco on June 27th, 2016, shared how the SEC plans to use its authority as a disclosure agency to require more information about the diversity of corporate boards. According to White, “the low level of board diversity in the United States is unacceptable.” “Our lens of board diversity disclosure needs to be re-focused in order to better serve and inform investors.” White would like to see more meaningful board diversity disclosures in companies’ proxy statements. This change follows a rather toothless rule passed by the SEC in 2009 that unintentionally allowed diversity disclosures to remain largely optional.
This announcement comes at the heels of a recent study by the Government Accountability Office (GAO). According to the GAO, if women continue to join corporate boards at the current rate, it will take more than 40 years to reach a 50-50 split. Corporate Boards: Strategies to Address Representation of Women Include Federal Disclosure Requirements, GAO-16-30 (December 2015). The report analyzed data from S&P 1500 companies from 1997 to 2014. By way of example, Catalyst, a diversity nonprofit, reported that in 2009, women held 15.2% of board seats at Fortune 500 companies. Today, that number has only risen to 19.9%. Even more disconcerting is that the percentage of companies with at least one minority director has declined from 90% in 2005 to 86% in 2015.
The 2009 Rule
The SEC’s 2009 rule requires companies to disclose whether and how their nominating committees consider diversity, and if they have a policy, how its effectiveness is assessed. “Proxy Disclosure Enhancements,” 74 Fed. Reg. 68334 (December 23, 2009). The rule was designed to inform investors about investment and voting decisions. Critics have stated that investors are interested in something more – such as racial, ethnic, and gender diversity of boards. As it stands, companies can comply with the rule without disclosing much information. If a company informs the SEC that they have no formal policy, they have met their burden. If that sounds unlikely, keep in mind that only 8% of companies in the S&P 100 reported they had a formal diversity policy for board members.
Inconsistent Definitions of “Diversity”
The 2009 rule also fell short by failing to define diversity. Unclear standards have led to companies defining it in ways that do not include race, ethnicity or gender. Aaron A. Dhir, author of “Challenging Boardroom Homogeneity: Corporate Law, Governance, and Diversity,” compiled and analyzed proxy statements from S&P’s 100 index. He found that between 2010 and 2013, only about half of companies in S&P’s 100 index interpreted diversity to mean gender, race or ethnicity. Most commonly companies cited “diversity of experience” as a deciding factor.
Investors are looking at detailed information about corporate board composition because studies show that diverse boards bring better returns. Diversity helps companies function better, as demonstrated by the strong correlation with company performance. Investors recognize that having a wide range of perspectives in a boardroom is essential to effective corporate governance, and companies should be aware of that desire and disclose appropriately.
Some companies have already provided voluntary disclosures above and beyond what is required under the current rules. According to White, these disclosures demonstrate that requiring more specific information would not be overly burdensome. Even so, it is shown to be both desired and needed by investors.
Although White did not reveal what the new changes will look like, one proposal from public fund fiduciaries in March 2015 encouraged the SEC to disclose all corporate director’s gender, race, and ethnicity alongside their skills and experiences. Time will tell what particular disclosures the new rule will require.
If you have questions regarding this topic, please contact the authors or your Seyfarth attorney.