The Securities and Exchange Commission (SEC) recently jumped on the corporate diversity bandwagon by issuing new compliance interpretations to guide companies in disclosing the self-identified diversity characteristics they rely on when nominating board members.
The issue has achieved greater prominence as corporate missions have been changing to establish these new goals and publicly-held corporations have not been shy about going on record as supporting these kinds of diversity initiatives.
Whether you regard it as progress or a fad, expanding diversity efforts have been embraced by a wide range of corporations. For example, organizations ranging from Target Corp. to the small Phillips Collection art museum in Washington, DC, have hired Chief Diversity Officers to drive their efforts to achieve those goals.
The SEC guidance says that to the extent a reporting company’s board nominating committee considers self-identified diversity characteristics (such as race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background), the commission will require the company’s disclosure to include those characteristics and how they were considered.
Companies also will be expected to identify any other qualifications taken into account by its diversity policy, which could include diverse work experiences, military service, or socioeconomic or demographic characteristics.
The focus on disclosing self-identified diversity characteristics mirrors the increasing demand from institutional investors and proxy advisors for board diversity and information regarding nomination decisions. A significant number of the nation’s largest investors now list board diversity, particularly in terms of gender, among their top priorities for selecting the companies in which they invest.
Improving board diversity remained a frequent shareholder governance proposal in 2018, and the Institutional Shareholder Services 2019 Voting Guidelines recommend highlighting boards with no gender diversity, point out attorneys with the law firm of Sullivan & Cromwell LLP.
Legislation called the Improving Corporate Governance Through Diversity Act of 2019 was recently been introduced in both the U.S. House of Representatives and Senate that would require public companies to disclose the gender, race, ethnicity and veteran status of their directors, director nominees and senior executive officers on an annual basis.
Last year, California passed a law requiring publicly traded companies headquartered in the state to have at least one female director on their boards by the end of this year and more in the future. Bills also are being introduced in New Jersey and New York that would require public companies to disclose data on diversity, including, the racial, gender and ethnic composition of company leaders.
The Dechert LLP law firm observes, “With these government initiatives proceeding on many fronts in tandem with a push by institutional investors and proxy advisors for improved director selection processes and disclosures, we expect that public companies will increasingly consider self-identified diversity attributes as part of their board composition discussions. Companies may also wish to review their director questionnaires in light of continuing developments in this area.”
The Sullivan & Cromwell attorneys note that the new SEC memos provide a roadmap for companies to effectively explain how they factor diversity into nomination decisions and other company policies. “To follow this approach, essentially a company needs to ensure that its directors self-identify as diverse and then link their diversity characteristics to the company’s relevant policies to the extent those diversity characteristics were considered.”