Friday, September 25, 2020

Lee calls on SEC to require diversity disclosure, address disparity of opportunity

By Anne Sherry, J.D.

In remarks at a Council of Institutional Investors conference, SEC Commissioner Allison Herren Lee emphasized the need for greater diversity within companies and even the financial regulators. Lee reiterated her call for the SEC to mandate diversity disclosure, saying that "what gets measured gets managed." She also called on the Commission to do more not just to increase diversity within its own ranks, but also to ensure that its rules address disparities such as wealth gaps and unconscious bias that can hinder minority and women entrepreneurs.

Lee first tackled the arguments that policymakers should not mandate social progress in the boardroom and that calls for corporate diversity are about equality for equality’s sake. "How can one possibly justify—in economic terms—the systematic exclusion of a major portion of our talent base from the corporate pool?" she asked. The commissioner cited several studies showing that diverse companies are more profitable and better innovators and said she has spoken to analysts at quant firms who include diversity metrics in their algorithms because diversity increases alpha. Nevertheless, and despite the SEC’s rules mandating disclosure of how diversity factors into board nominations and guidance encouraging disclosure of characteristics of board candidates, women of color hold less than 5 percent of Fortune 500 board seats, and less than 1 percent of Fortune 500 CEOs are Black.

To improve diversity, Lee suggested that the SEC revisit the amendments to Regulation S-K to require disclosure of workforce diversity. The SEC adopted the amendments in August over Lee’s dissent, which criticized the release’s silence about diversity and climate risk. In her speech at the CII conference, Lee said that the SEC has recognized both that disclosure can influence corporate conduct and that impact is consistent with the philosophy of the disclosure provisions of the securities laws. The "what gets measured gets managed" phenomenon means that requiring a company to disclose certain topics can influence their treatment of those topics. Furthermore, transparency creates external pressure because investors and others can then make comparisons between companies.

Lee also pointed to a lack of diversity at the top levels of financial regulators as well as within the financial services industry. On the latter point, she said a 2017 GAO report found only a marginal increase in minority representation, and no increase for women, at the management level of financial services firms between 2007 and 2015. The commissioner said that a wealth gap between minority and non-minority communities can prevent minority entrepreneurs from using their own capital in their businesses or as collateral, and disparities in lending practices can hinder minority and women founders from obtaining loans.

The SEC could address some of these challenges by having its Division of Economic and Risk Analysis analyze how the SEC’s rules will affect underrepresented communities, Lee said. She observed that the economic analyses in rules, particularly rules relating to capital-raising, often claim that minority- and women-owned businesses will benefit simply because the rule is loosening restrictions that apply equally to all businesses. A better approach would analyze whether and, if so, how a proposed rule addresses the challenges faced by minority- and women-owned businesses.

Lee also said that the SEC has "a tremendous resource" in the Office of Minority and Women Inclusion and should consider better integrating that office’s work into the agency’s policymaking. OMWI implemented a voluntary diversity self-assessment for regulated entities, but the response rate has been only 4 percent. The SEC could ask for comment on how to encourage voluntary reporting or on whether it should add these disclosures to those already required for regulated entities. The agency could also give OMWI an expanded role in the rulemaking process, offering the office an opportunity to review and comment on drafts with a particular eye on how the rulemaking may affect existing disparities or affect diversity concerns.

Finally, Lee suggested the Commission work with other agencies, such as the Consumer Financial Protection Bureau and the Small Business Administration, to address discrimination and support minority- and women-owned small businesses. The agency could also work with the banking regulators to address a House FSC staff report finding that women- and minority-owned firms are underrepresented as asset managers and that large banks generally do not prioritize investing with diverse firms.