Interpretive guidance updated to clarify board diversity disclosures

The Security and Exchange Commission’s (SEC) Division of Corporation Finance (CorpFin) on Feb. 6, 2019, updated interpretive guidance to clarify disclosures about board diversity.

The staff inserted a new item to the Compliance and Disclosure Interpretations (C&DIs): Regulation S-K related to Subpart 400 of Regulation S-K, which is a set of rules covering information outside the financial statements that companies must provide in their periodic reports and public offerings. Subpart 400 deals with information related to executive pay, board director qualifications and other corporate governance matters. The staff guidance uses a question and answer format.

Question 116.11 of the C&DIs asks what aspects about a board member in terms of diversity is required to be disclosed under Item 401. Question 133.13 deals with the same question for a board nominee under Item 407.

This question comes as investors and some Democrats on the Capitol Hill in the past several years have sought greater disclosure about a board members’ race, gender and ethnicity. They believe a more diverse board benefits the company over the long-run, but many public companies have lagged in increasing women and minority representation in their boards, or companies have not been providing adequate information about the makeup of their boards.

The question notes that certain board members or nominees have voluntarily provided to the company specific information about their race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background.

Item 401(e) requires a brief discussion of the specific experience, qualifications, attributes or skills that led to the conclusion that a person should serve as a director.

“To the extent a board or nominating committee in determining the specific experience, qualifications, attributes or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) of an individual who has consented to the company's disclosure of those characteristics, we would expect that the company’s discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered,” the staff answered in the C&DIs.

Similarly, the staff said companies should provide a discussion of how the company considers the self-identified information of nominees under Item 407 as well as any other qualifications, such as diverse work experiences, military service or socioeconomic, or demographic characteristics.

Separately, the SEC in August 2016 issued a preliminary rulemaking document to seek comments on disclosures about executives and board of directors as part of the broader Disclosure Effectiveness initiative in Release No. 33-10198, Request for Comment on Subpart 400 of Regulation S-K Disclosure Requirements Relating to Management, Certain Security Holders and Corporate Governance Matters. The document was issued when Mary Jo White ran the agency. The chairman sets the commission’s rulemaking agenda, and Jay Clayton has removed this particular release from agency action.

Under White, the SEC had also been working to publish a proposal to require more disclosures about the diversity of directors and nominees but was not able to do so. White had said that she considers diversity “enormously important.”

However, Clayton has shifted the agency’s priorities. He has largely focused on scaling back the requirements to encourage more companies to go and stay public, and he put corporate diversity on long-term agenda. Items that are relegated to long-term action usually do not get priority or are silently dropped over time.

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