SEC encourages board diversity disclosure

As US public companies prepare for the 2019 proxy season, the SEC has given them a nudge toward disclosing details on how they take diversity into account when making decisions about the composition of their board.

The agency has taken the step at a time when there is growing investor pressure to boost diversity on boards, and an intensifying focus on human capital issues in general. The move comes in recently updated compliance and disclosure interpretations – specifically, questions 116.11 and 133.13 – issued by the SEC’s division of corporation finance regarding how companies comply with Regulation S-K, which governs reporting such as proxy statements.

In the new guidance, officials note that Item 401(e) of Regulation S-K requires a brief discussion of the specific experience, qualifications, attributes or skills that led to the decision that a person should serve as a director.

To the extent a board or nominating committee considers self-identified diversity characteristics provided by individuals – such as race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background – in making such a decision, ‘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,’ officials write.

Meanwhile, Item 407(c)(2)(vi) requires companies to provide a description of how a board implements any policies it follows regarding the consideration of diversity in identifying director nominees.

Similarly, the SEC ‘would expect any description of diversity policies followed by the company under Item 407 to include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experience, military service, or socio-economic or demographic characteristics,’ officials state.

Attorneys at Dechert, writing in a commentary on the new guidance, note three key aspects:

• It applies to disclosure regarding diversity characteristics of board members or nominees in proxy statements or other SEC filings
• It is limited to those characteristics an individual self-identifies and that are taken into account by the board or nominating committee
• It applies only if the individual has consented to the company disclosing the information.

They also note that there is a broader regulatory and statutory push for greater board diversity. For example, a bill has recently been introduced in both houses of Congress that would require public companies to disclose each year the gender, race, ethnicity and veteran status of their directors, director nominees and senior executive officers.

California has also introduced legislation that will require public companies headquartered in the state to have at least one female director by December this year.

‘With these government initiatives proceeding on many fronts in tandem with a push by institutional investors and proxy advisers for improved director selection processes and disclosures, we expect public companies will increasingly consider self-identified diversity attributes as part of their board composition discussions,’ the Dechert attorneys write. ‘Companies may also wish to review their director questionnaires in light of continuing developments in this area.’