A New Era of Corporate Disclosures and Social Responsibility

In light of recent events and social media exposing continued racial inequalities in the United States, social justice has become a topic at the forefront of discourse. Calls for change and acknowledgment of social justice issues have reached further into the corporate sphere with both the U.S. Securities and Exchange Commission (“SEC”) and shareholders alike demanding more accountability and transparency on the impact corporations have on racial inequalities. (U.S. Securities and Exchange Commission). Recently, Apple shareholders, against the Apple CEO’s recommendation, approved proposals for audits on the company’s civil-rights impact, including the company’s diversity, pay equity, and use of concealment clauses in employment agreements. (Gurman, Bloomberg Law). This recent push is one of many instances calling for similar corporate action and accountability across the board. (Maiden, Corporate Secretary). With recent SEC focus on social justice, new regulations and shareholder pressure, social justice is a topic corporations won’t be able to avoid much longer.   

In March of 2021, the SEC announced the creation of a new specialized task force aimed at targeting environmental, social, and governance (“ESG”) issues among corporations. (Hendrick, Law360). Inclusion and racial inequality in the work force are cornerstones of the social factor of this task force. Id. While the task force hasn’t had ample time to fully demonstrate their efficacy at addressing and tracking companies’ social impact, the task force’s creation and SEC statements indicate a clear move by the SEC to target racial inequality in corporations. (Johnson, Reuters). As of now, the main method of gauging the impact of corporate equity and inclusion efforts is by gathering and analyzing companies’ diversity metrics. (Romansky, Garrod, Brown, & Deo, Harvard Business Review).

Currently, the EEOC requires companies with at least 100 employees to submit annual reports on multiple diversity factors of its employees, including race, gender, and ethnicity. (Beyoud & Ramonas, Bloomberg Law). However, these reports are kept confidential and left entirely to companies to decide whether to voluntarily disclose the reports to the public. Id. While it’s not yet clear how exactly the SEC plans on addressing shareholder requests that these reports be made public or the consequences for substandard diversity, some change is coming. (Ramonas, Bloomberg Law). The current voluntary disclosure approach leaves the ball in companies’ courts and can keep the public in the dark by companies choosing not to disclose their reports. (Green, Bloomberg). To this end, many companies are reluctant to voluntarily disclose the information, voicing concerns about how the data could be taken out of context and expose the company to more liability. Id. While compulsory disclosure of these metrics would likely be received with significant pushback, the SEC has other plans on encouraging more diversity metric disclosures. (Beyoud, Bloomberg Law).

In November of 2021, the SEC adopted rules aimed at easing shareholders’ ability to vote remotely and bring proposals to meetings to encourage corporate accountability to shareholder concerns and enable more shareholders to vote. (Zanki, Law360). These shareholder proposal rule changes are paired with new SEC rules aimed to limit the number of corporation’s “no-action” requests granted by the SEC. Id. These requests are made by corporations to the SEC to not have to address and include certain shareholder proposals for voting during shareholder meetings. Id. Renee Jones, the director of the SEC’s Division of Corporation Finance stated that most of these “no-action” requests concerned shareholder proposals about disclosures regarding corporate governance and discrimination, among other ESG topics. Id.These no-action requests indicate a clear reluctance of corporations to address these diversity and equity issues to shareholders publicly, as well as the corresponding difficulties shareholders face in demanding accountability. In implementing ESG rules, the SEC is looking to limit the success of no-action requests relating to human capital management issues with broad societal impacts. (Zanki, Law360). Traditionally, corporations could move to exclude proposals on the grounds that such proposals didn’t address significant issues to the company. Id. Now, the SEC has addressed corporate reluctance by granting fewer “no-action” requests to corporations and easing both shareholder proposals and shareholder’s ability to vote on issues. Empowering shareholders may be the most direct and efficient way for the SEC to achieve these corporate disclosure and accountability goals until the SEC can develop an effective regulatory scheme to do so independently.

Shareholder empowerment is valuable in addressing corporate social accountability due to the increased and empirically supported shareholder concerns about social issues. Morgan Stanley & Co. recently conducted a survey finding over 90% of millennial investors, the largest growing group of new investors, were interested in sustainable investing and socially conscious companies. (Hatter, Hanson & Vozarova, Law360). Furthermore, a separate study found 60% of all investors surveyed indicated an interest in prioritizing board and workforce diversity, equity, and inclusion in 2022. (Smith, EY). Investors believe that addressing relevant ESG issues will lead to increased financial performance, especially considering the number of ESG-conscience consumers emerging in the market. Id.

While investors continue to ask for disclosure of the mandatory SEC diversity reports mentioned earlier, many investors want greater inclusiveness and see these reports only as a baseline. Id. Some investors are demanding more than just metrics on inclusiveness, seeking reports to understand how companies are addressing the impacts of their businesses in racial equity through their business models, products, and marketing. Id. While some companies are addressing these concerns internally through “employee listening” via surveys and focus groups, many proponents of increased corporate social accountability don’t see this as enough. (Buss, SHRM). Other companies, such as Meta Platforms Inc. (formerly “Facebook”) are hiring independent auditors to judge their social impacts. (Nix, Bloomberg Law). ACLU veteran Laura Murphy was hired to conduct Facebook’s audit, evincing a serious, although superficial, approach by the company to the topic. Id. However, despite the public relations benefit of hiring an independent auditor, Facebook was still reluctant to make the results public. Id. While independent audits on diversity signal a company’s social justice concern to the public, reluctance in disclosing audit results defeats the purpose of the audit. Id.

In light of the social and regulatory pressures companies are facing to increase transparency regarding their impact on inequality, increased disclosure of these metrics could benefit corporations in other ways as well. In addition to increased investment and societal benefits companies can create by focusing on diversity and equality within their companies, there are strong correlations between diversity in the workforce and financial performance, innovation, and creativity. (Michalak & Jackson, Harvard Business Review). These correlations between business benefits, investment, and diversity provide a strong financial incentive for corporate social consciousness and accountability. Studies have found that companies with the strongest racial and ethnic diversity are 35% more likely to see financial gains above their industry competitors. (Maiden, Corporate Secretary).

Considering the increased pressure, both by the SEC and the public, it would be prudent for companies to increase disclosure of their impact on inequality and take a more public stance on social issues. Moreover, considering the financial and business benefits behind increased diversity, such changes like focusing on diversity and equality within their companies, and disclosing related information to the public would be beneficial to companies’ value as well. The time of avoiding public disclosure of corporate diversity is gone, and no company will be able to survive in the future climate without at least publicly addressing the topic. Corporate disclosure of diversity, equality, and inclusion metrics is only the first step. The calls for social justice have reached the corporate sector, and it is on corporations to respond before it’s too late and they are left in the past.