Corporate Governance

The SEC and Corporate Governance: The Limits of Disclosure (Exchange Act Release No. 61175)(A Tentative Foray into Board Diversity)

By J. Robert Brown

We are discussing the SEC's latest corporate governance disclosure requirements adopted in Exchange Act Release No. 61175 (Dec. 16, 2009).

Board diversity can be an important societal concern.  It can also affect the decision making process.  Greater diversity may result in a wider range of views that can be shared with the CEO and other officers in making important decisions.  Some countries, such as Norway, have addressed the dearth of diversity (at least with respect to gender) through legal mandate.  The country requires that boards of large public companies include at least 40% of each gender, effectively forcing companies to increase the number of women on the board.

Boards in the US are not particularly diverse.  They consist of about 13% for women and about 11% for  people of color. 

As the issue grows in importance, the Commission has delved into the area in a tentative fashion.  In suggesting the need to disclose these types of policies, commentators 'noted that there appears to be a meaningful relationship between diverse boards and improved corporate financial performance, and that diverse board can help companies more effectively recruit talent and retain staff.'  

Companies must now disclose whether and how the nominating committee 'considers diversity in identifying nominees' for director.  See Item 407(c)(2)(vi).  The term was undefined but broadly construed.

• For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin.  We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate.

The language has two problems.  First, by specifically mentioning race, gender and national origin, it omits sexual orientation, even in the category of "expansive."  Second, it suggests that diversity is an either/or situation.  In fact, companies ought to be required to report their policies with respect to race and gender and have the option of reporting other policies as well. 

In any event, this is a first for the Commission.  It creates a disclosure requirement that puts the agency in the middle of the debate over board diversity.  It will be the data disclosed as a result of this requirement that causes shareholders and investors to put pressure on boards to change the policy and take a more active approach in the diversification of boards.

For more on the SEC and its use of disclosure to affect the corporate governance process, see Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure.

Full post as published by The Race to the Bottom on February 24, 2010 (boomark / email).