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On February 6, 2019, the SEC Staff issued a new interpretation relating to director qualifications and diversity which could impact proxy statement disclosures for the upcoming proxy season, and potentially D&O questionnaires as well. On the same day, companion bills were introduced into both the U.S. House of Representatives and Senate that would require every public company to disclose in proxy statements: (i) data regarding the racial, ethnic and gender composition of its board of directors, director nominees, and executive officers, as well as the status of any such person as a veteran, in each case, based on voluntary self-identification; and (ii) whether the board has a policy or strategy to promote racial, ethnic and gender diversity among directors, nominees or executive officers. The SEC’s interpretation and the Congressional “Corporate Diversity Bill” are the latest evidence that efforts over the past two years for enhanced board diversity are gaining considerable momentum.1
Board Diversity Disclosure – SEC’s New CDI
The Division of Corporation Finance (Division) of the U.S. Securities and Exchange Commission this week addressed board diversity disclosure through two identical Compliance & Disclosure Interpretations (CDIs) under Regulation S-K – 116.11 and 133.13. The CDI addresses what type of disclosure is required in connection with Items 401(director qualifications) and 407 (director nominee qualifications) when board members or nominees have “consented” to the company’s disclosure of certain “self-identified” diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background.
The Division provides that to the extent the board or nominating committee, in determining the specific experience, qualifications, attributes, or skills, considered the self-identified diversity characteristics, it would expect the company’s disclosure to include, but not necessarily be limited to, “identifying those characteristics and how they were considered” (the “qualifications” disclosure required by Item 401). Moreover, it 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 experiences, military service, or socio-economic or demographic characteristics.
An interesting aspect arising from the CDI is that directors and director nominees would need to both “self-identify” with certain diversity characteristics, as well as “consent” to the company’s disclosure of these characteristics. Currently, it is not common practice for director questionnaires or similar forms to ask directors and nominees to identify diversity characteristics, diminishing the opportunity for self-identification. Moreover, even if a director or nominee chooses to self-identify and consents to the disclosure of this information, under the CDI, the company would only be required to disclose those diversity characteristics if the board considered such characteristics in concluding that the individual should serve as a director, or otherwise has a policy that includes the consideration of such diversity in identifying director nominees. Even then, it appears that the company would only be required to disclose how it considered these diversity characteristics, and would not necessarily be required to disclose the type of board composition data the Congressional bill seeks to have disclosed (see below). However, companies with policies that actively consider and promote the disclosure of such diversity among its board members should review their questionnaires and consider adding a diversity self-identification question and option for directors and nominees to consent to the release of such information.
Improving Corporate Governance Through Diversity Act of 2019
As discussed in our Alert available here, certain Democratic members of the U.S. Congress have been pushing for years for greater board diversity disclosure. It thus comes as no surprise that as the Democratic Party takes command of the House of Representatives, those efforts are ramping up, the latest being the Improving Corporate Governance Through Diversity Act of 2019, introduced this week by Representative Gregory W. Meeks, with a companion bill simultaneously introduced by Senator Bob Menendez in the Senate.
The bill, which garnered the support of the Council for Institutional Investors and the U.S. Chamber of Commerce, would require public companies to disclose annually in their proxy statements data on the racial, ethnic, and gender composition, as well as veteran status, of its board of directors, director nominees and executive officers based on voluntary self-identification. Moreover, disclosure regarding the adoption of any board policy, plan or strategy to promote racial, ethnic, and gender diversity would be required. In addition to these disclosure requirements, the bill directs the SEC’s Office of Minority and Women Inclusion to publish best practices for corporate reporting on diversity. Interestingly, while the spotlight on diversity has mostly focused on the board up-to-date, the bill goes a step further to also cover executive officers.
We expect the push for board diversity to continue, or even accelerate, in the upcoming year. Directors and senior management therefore should be prepared to respond to the many forces seeking change, including by taking a proactive approach to evaluating their own board composition, as well as considering how to best tell the “company’s story” through proxy statement disclosures.
- We have previously discussed how boards are under mounting pressure from institutional shareholders, pension funds and proxy advisory firms to increase board diversity. With State Street’s policy to vote against the entire nominating committee of a company with no female directors in the absence of successful dialogue (as discussed in our Alert available here), the New York City Comptroller’s engagement with nominating committee chairs of 151 public companies seeking disclosure of the skills, race and gender of each board member in a standardized “matrix” format, and ISS and Glass Lewis voting policies holding nominating committee chairs accountable for a lack of board gender diversity (as discussed in our Alert available here), one thing is clear – the spotlight on board diversity shines bright. Additionally, as discussed in our Alert available here, California last year became the first U.S. state to require listed companies with a principal executive office in California to have a minimum number of women on their boards. New Jersey, following California’s example, recently proposed a similar bill.≈