Thursday, December 08, 2016

Advisory committee considers tweaks to board diversity disclosure recommendation

By Amy Leisinger, J.D.

Following a presentation on the work of the Small Business Administration Office of Investment and Innovation, the SEC’s Advisory Committee on Small and Emerging Companies decided to delay a recommendation relating to board diversity disclosures. Committee members expressed concern regarding the draft recommendation’s use of the term “ethnicity” in connection with diversity disclosures and suggested a strong approach to encouraging disclosure of information regarding race, gender, and ethnicity while providing boards with the option to opt out of disclosure. The co-chairs agreed to rework the draft recommendation to including the modifications suggested at the meeting for consideration at a meeting early next year.

Diversity disclosure recommendation. The committee previously determined that proscribed diversity standards are not the answer but suggested that disclosure of director characteristics may be the best way to address the diversity issues, particularly with regard to any unconscious biases that may be looming within a company. Members noted the importance of information regarding board diversity to stockholders, employees and customers and the connection between diversity and improved competitiveness, greater capital access, and sustainable profits. In 2009, the Commission did adopt Regulation S-K Item 407(c)(2)(vi) requiring companies to disclose in proxy statements whether and how nominating committees consider diversity in identifying director nominees and if they have policies regarding consideration of diversity and, if so, how they are implemented and assessed. However, the committee found, the rule has not generated genuinely useful information for stakeholders.

As such, the committee issued a draft recommendation requesting that the SEC amend the provision to additionally require issuers to describe the diversity of their boards. According to the draft, while the meaning of “diversity” is better left each company and its board, each issuer should be required to include each board member’s race, gender, and ethnicity, at least to the extent individual directors self-identify.

However, several members took issue with the potential breadth and meaning of “ethnicity” in terms of the proposed disclosures, noting that the exact parameters of the phrase could be difficult to ascertain. In addition, other members suggested that the recommendation should make diversity disclosure the default activity and provide only for explicit opting out by boards that choose to do so. The primary goal of this change should be to encourage boards to have conversations about diversity and the approaches of their respective companies, they concluded.

As a result, the committee declined to adopt the recommendation at today’s meeting and will consider a version incorporating members’ suggestions and addressing their concerns at the forthcoming meeting.