Small company advisory panel weighs complexity of diversity disclosure rule

Members of the SEC’s Advisory Committee on Small and Emerging Companies discussed ways to promote diversity on public company boards, although they were unable to come up with a policy recommendation.

The discussion took place as the commission develops a proposal to expand diversity-related disclosures in corporate filings.

The panel advises the SEC on matters relating to private companies and public companies with less than $250 million in market value. At its October 5, 2016, meeting, the committee struggled with ways to reduce the ethnic, socioeconomic, and gender homogeny of boards without resorting to quotas or so-called “name-and-shame” tactics aimed at individual companies.

In 2009, the SEC issued Release No. 33-9089, Proxy Disclosure Enhancements. The release’s requirements included one that called on public companies to provide information regarding their consideration of diversity in the director selection process. Release No. 33-9089 sidestepped the issue of actually defining diversity, however, concluding that companies “should be allowed to define diversity in ways that they consider appropriate.”

In a speech in late June in San Francisco, SEC Chair Mary Jo White said the agency staff is preparing a recommendation on amendments to the rule “to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.”

“Some may oppose even minimally more prescriptive diversity disclosure requirements,” White said. “My view is that the SEC has a responsibility to ensure that our disclosure rules are serving their intended purpose of meaningfully informing investors. This rule does not, and it should be changed.”

Stephen Graham, who cochairs the Advisory Committee on Small and Emerging Companies, acknowledged the challenges in defining diversity, but said that “an adequate definition is needed.”

“It doesn’t have to be race, ethnicity, gender,” Graham said. “But I think that race, ethnicity and gender have to be part of the conversation.”

He said boards are often lacking in diversity “because they really aren’t paying attention.” While some countries have mandated diversity quotas on boards, “even if we were in a position to impose quotas, I wouldn’t be in favor of that.”

Committee members echoed Graham’s opposition to quotas, and they also were reluctant to support a disclosure regime based on identifying and publicizing diversity failures at specific companies, a practice known as “name and shame.”

Cochair Sara Hanks mentioned the negative publicity surrounding a newly public company in Silicon Valley that was widely panned for having an all-male board. “No one needed to ‘name and shame’ them from a government point of view, because Twitter did it for them,” she said. Hanks did not identify the company in question.

Twitter itself was attacked in 2013 over its all-male board. Later that year, it added former Pearson PLC CEO Marjorie Scardino to the board. It has since named two more women as directors: BET Chairman and CEO Debra Lee and tech entrepreneur Martha Lane Fox.

Panelist Patrick Reardon suggested the only way to improve board diversity is by making an economic case to companies themselves. “If you can package this, and go to somebody with ‘this is good for business,’ not ‘you’re going to get embarrassed,’ or ‘you’re going to get shamed for this’...that’s an easy one to sell,” he said.

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