The SEC’s guidance on diversity disclosure requirements

The SEC requires public companies to disclose information and data that may be important to potential investors and shareholders of the company. On February 6, 2019, the SEC’s Division of Corporation Finance released two Compliance and Disclosure Interpretations ("CDIs")that discussed disclosure requirements for instances when board nominees or directors self-identify with specific diversity characteristics such as, race, gender, ethnicity, religion, sexual orientation, nationality, disability, and cultural background. In such instances, the SEC expects the public company to identify those characteristics and include how they were considered as long as the director or nominee consents to such disclosures. 

Item 401(e) requires the company to describe “the specific experiences, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director.” CDI 116.11and 133.13clarify that if specific diversity characteristics were used in selecting the director, the SEC would expect such characteristics to be disclosed as part of the company’s item 401 requirements.

Item 407 concerns nominees and has similar disclosure requirements as item 401(e). CDIs 116.11and 133.13state that the SEC would like the company to disclose how it considers such qualifications and characteristics in the diversity policy they use when selecting a nominee. It also seeks disclosure of other qualifications such as “diverse work experiences, military service, or socio-economic or demographic characteristics.”

These CDIs are not surprising considering the changing US demographics and demands from shareholders and potential investors. There could be several reasons for these demands, such as protecting the best-interests of all shareholders and making all shareholders feel represented and heard. Directors from various backgrounds bring different experiences to the table, thereby encouraging a challenging dialogue and a well thought out decision-making process. Additionally, an increasing number of studies highlight the advantages of a diverse board. One research studyfound that companies that were in the top-quartile of board diversity outperformed their peers by achieving an average Return on Equity of 53% higher as compared to those in the bottom-quartile of board diversity. A more recent study published by Deloitte and Alliance for Board Diversity highlighted that between 2012 and 2018, the number of Fortune 500 companies with greater than 40% board diversity had doubled

The SEC CDIs have come at an appropriate time because individual states are also beginning to see the benefit of having diverse boards lead companies. California passed Senate Bill 826that requires publicly traded companies headquartered in California to have at least one female member on the board of directors by the end of 2019. It also requires a minimum of two female directors on a board with five members and at least three female directors on a board with six or more members. (Id.) California was the first state to introduce such a law to reduce the gender gap in the field of business, but other states may soon adopt similar legislation based on shareholder demands. As trustee of the New York State Common Retirement Fund (and also NY State Comptroller), Thomas P. DiNapoli has filed shareholder proposals at several companies seeking board diversity policies, and at least 10 companies have responded by adding at least one woman to their boards. This movement is not limited to New York, the SEC and the media have seen an increase in shareholder proposalsconcerning board diversity in 2019. From January through March of 2019 there have been 21 shareholder proposals related to the issue of board diversity, compared to 30 such proposals filed in the full year of 2018.

Considering California is the hub for start-ups, it will be interesting to see how the new law that mandates women representation on boards will affect companies that rely on venture capitalists, who often require a board seat in exchange for funding the company. Furthermore, not all companies that have offices in California are actually headquartered there, as a result this law wouldn’t apply to those companies. Whether this law would be a deciding factor in whether companies choose to be headquartered in California remains to be seen.  

Similar research and movements have occurred on the global stage as well. In December 2018, the Canada Pension Plan Investment Board adopted a policyto vote against the chair of the board of any company that it invests in if the board has no women directors. Their reason behind advocating for more diverse boards is the purported correlation between superior long-term financial performance and gender-diverse boards. In Europe, the European Women on Boards released its first ever Gender Diversity Indexthat compared the current board representation of nine European nations. Seeking to increase the visibility around board diversity issues in Europe, it found that France had the highest share of women on boards at 44.2% compared to the second highest nation – Italy at 36.5%. 

With the 2019 proxy season now underway and shareholder’s demand for more transparency, especially with issues concerning board representation, gender-pay equity, workplace diversity, and sexual harassment policies, it will be interesting to see the impact of such movements and regulations. The failure to address these topics could be a deciding factor for some employees and investors when making decisions about their future.