Friday, February 05, 2016

SEC Should Require Gender Pay Discrepancy Disclosure, Adviser Says

By John Filar Atwood

Pay equity is an indicator of a well-managed, well-governed company, according to investment adviser Pax Ellevate Management, which has asked the SEC to require public companies to disclose gender pay ratios every year. If the Commission does not adopt the requirement, the adviser asked that it at least provide guidance to companies regarding voluntary reporting on pay equity to their investors.

Pax Ellevate is the adviser to Pax Ellevate Global Women’s Index Fund, and is chaired by Sally Krawcheck, the former CFO of Citigroup who also held management positions at BofA Merrill Lynch and Smith Barney. She co-authored Pax Ellevate’s rulemaking petition, in which the adviser noted that the U.S. has the widest male-female pay gap among the 38 countries surveyed in the International Labor Organization’s 2014-2015 wage report.

Material risk. Pax Ellevate views pay inequality as a material risk to investors that leaves companies vulnerable to litigation, regulatory and reputational problems. Conversely, pay equity can be a driver of greater gender diversity in corporate leadership, the adviser noted, and research studies have correlated gender diversity with superior financial performance over the long term.

Pay discrimination can be costly, the adviser said, observing that there are currently 1,880 wage enforcement actions related to gender in the U.S. Most are settled out of court but still require payment of the settlement amount over and above the time and expense of defending the lawsuit, the adviser said.

Signs of trouble. Disclosure is important, in Pax Ellevate’s opinion, because careful investors often look for signs of trouble before problems arise. In order for investors to see signs of trouble, the data must be publicly available. In addition, the adviser believes that wage disparities by gender continue to exist, in part, because of the secrecy that surrounds compensation at many public companies.

In its petition, the adviser noted that the pay disparity issue dovetails with two other hot topics in the corporate governance area—gender diversity on boards of directors and the disparity between executive pay and the median compensation at companies. On the first issue, the SEC has issued guidance under Regulation S-K requiring disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director. The pay ratio issue was addressed in the Dodd-Frank Act and a subsequent rule adopted by the SEC.

While neither the new pay ratio rule nor Regulation S-K specifically addresses gender pay disparity, Pax Ellevate said, the logic behind them is the same. They both address the fact that companies that discriminate against any class of employees, or allow large pay disparities to exist among classes of employees, bear increased regulatory, litigation, and reputational risk.

The adviser also argued that the materiality of gender pay ratios falls within the definition of materiality set forth in Staff Accounting Bulletin No. 99, which deems a matter material if a reasonable person would consider it important. Pay equity is an increasingly important indicator of a company’s ability to attract, retain, and develop a first-class workforce, the adviser stated. Reasonable investors would consider the information important, it added, so it should be disclosed.

Logical next step. Pax Ellevate pointed out that the new pay ratio rule already requires companies to collect the data that would be needed to report on gender pay ratios, which would alleviate any burden associated with additional data collection. Reporting pay ratios by gender is the natural next step in providing investors with a more complete picture of how companies are managing compensation issues, the adviser concluded.

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