SEC Faces Tough Task in Defining Board `Diversity'

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By Michael Greene

July 7 — The primary challenge facing the Securities and Exchange Commission as it once again tackles the issue of board diversity is defining what “diversity” actually means, corporate governance experts told Bloomberg BNA.

The commission must consider the “multiple dimensions of diversity,” said Stanford law professor and former SEC member Joseph Grundfest. Beyond gender, there are numerous ways to classify ethnic diversity, “and the classification challenges in this space are legendary,” he told Bloomberg BNA in an e-mail.

Will the agency, for example, define who is African-American or will it leave it to directors to self-identify, or will the agency require that the corporation classify each director's ethnicity? Grundfest asked. In addition, how will the agency approach disclosures when directors prefer not to be classified or when they can claim multiple heritages?

“Some diversity advocates are also calling for greater representation of the LGBT community in the boardroom,” he added. “Will the agency call for disclosure of sexual preference as part of this initiative?”

The commission further must think carefully about the objectives it is seeking to achieve through its disclosure regime, and how those objectives are rationally related to the agency's mission, Grundfest said.

White's Speech

In a June 27 speech, SEC Chairman Mary Jo White said the SEC staff is working on a recommendation that would require companies to disclose more information about the diversity of their director nominees (125 CARE, 6/29/16).

White said that a rule adopted by the agency in 2009 requiring companies to disclose whether, and if so how, they consider diversity in choosing directors hasn't had much of an impact.

The SEC chair also cited statistics showing that U.S. companies trail their counterparts in other countries in terms of board diversity. According to White, women held 15.2 percent of board seats at Fortune 500 companies in 2009, and that number has only increased to 19.9 percent over the last six years. She also observed that the percentage of the top 200 companies in the S&P 500 with at least one minority director decreased from 90 percent in 2005 to 86 percent in 2015.

“The low level of board diversity in the United States is unacceptable,” White said.

Narrowing the Definition?

One of the primary defects of the 2009 rule is that it didn't define “diversity,” some observers said.

Companies took an over-broad view of the term, said Charlotte Laurent-Ottomane, executive director of the Thirty Percent Coalition, an organization of 80 members that includes public companies and institutional investors.

A narrower definition is necessary in order to make a rule more effective, said Laurent-Ottomane, whose organization is committed to the goal of women, including women of color, holding 30 percent of board seats in public companies. “Gender, race and ethnicity is what we are talking about” when it comes to diversity, not what university a candidate went to, she told Bloomberg BNA.

While most companies disclosed that they do in fact consider “diversity” when appointing directors, only about half have defined diversity in the “socio-demographic terms of gender, race, or ethnicity” said Serena Fong, vice president of government affairs at Catalyst, a nonprofit organization whose mission is to accelerate the progress for women through workplace inclusion.

Fong told Bloomberg BNA that many companies consider diversity in terms of experience, rather than gender or ethnicity. “In the absence of additional guidance about what the term means, companies have been able to demonstrate that they do indeed take some form of diversity into account, but the current disclosures have been ineffective in advancing gender and racial/ethnic diversity in the boardroom,” she said.

Recommendations for the SEC

Nonprofit group Catalyst suggests a “comply or explain” approach that would make companies disclose, or explain why they don't have policies for:

  •  director term limits;
  •  representation of women on boards and in executive officer positions; and
  •  the board or nominating committee's consideration of female representation in the director identification and selection process.

Requirement such as these “enable investors to make more informed decisions,” Serena Fong, vice president of government affairs at Catalyst, told Bloomberg BNA. “Investors and shareholders look to the government to ensure that they have access to the information necessary to assess a company’s integrity.”

Difficult Task

There are a million factors that can go into diversity, Peter Gleason, president of the National Association of Corporate Directors, told Bloomberg BNA. “It's a complex issue,” he said, adding that the SEC has a tough task ahead of it in coming up with an effective rule.

It may be hard for the SEC to put one diversity dimension above another because it is so business-dependent, Gleason continued. To find the “right recipe,” the SEC staff may have to review corporate filings for disclosures that it considers particularly good, he said.

Gleason also noted that companies must do a better job of explaining what they are considering when it comes to diversity. Shareholders want to know why a board's composition represents the best combination of skills, experience, background and diversity that will help the company perform at its highest level, he said.

Requiring Disclosures

In addition to defining the term, the SEC must also consider what it wants companies to disclose, observers said.

Lissa Lamkin Broome, a law professor at the University of North Carolina, told Bloomberg BNA in an e-mail that a simple requirement that would allow shareholders to easily discern the gender and racial/ethnic make-up of board nominees could be beneficial.

Determining the race/ethnicity of a director often isn't obvious, so why not just have the company disclose it? she asked. “If shareholders care about having a diverse board, they can express their preference with their vote or in discussions with management and the board about presenting a more diverse slate of board nominees,” Broome said. “If shareholders don’t care about the diversity of the board, then they can ignore this disclosure.”

The North Carolina State Treasurer's Office and eight other large pension funds petitioned the SEC in 2015 to adopt new disclosure requirements that indicate a director's gender, race and ethnicity in a chart or matrix that also includes his or her skills and experience (13 CARE 713, 4/3/15).

Broome, who assisted the treasurer's office in preparing the petition, said the chart/matrix approach alleviates concerns about information overload because it is intended to be a “one-page snapshot.”

“I don’t think this proposal presents much of an additional burden to the company beyond having each director confirm his/her gender and race/ethnicity, she said.

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Yin Wilczek at

For More Information

The text of White's speech is available at

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