Advisory Committee Recommends Robust Diversity Disclosure to the SEC

On February 16, 2017, the Advisory Committee on Small and Emerging Companies (“Advisory Committee”) provided a recommendation to the SEC regarding corporate board diversity.

The Advisory Committee was organized in 2011 to provide the SEC with advice on its rules, regulations, and policies related to capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; trading in the securities of such businesses and companies; and public reporting and corporate governance requirements to which such businesses and companies are subject.

The Advisory Committee discussed the corporate board diversity recommendation at its meetings held on October 5 and December 7, 2016, and the recommendation was approved by the members of the Advisory Committee at its meeting held on February 15, 2017.

The Advisory Committee emphasized that “board diversity has been associated with improved competitiveness and talent management, greater access to capital, more sustainable profits, and better relations with stakeholders and therefore plays an important role in capital formation for small and emerging companies.”

The current rule related to board diversity was adopted by the SEC in 2009 (Item 407(c)(2)(vi) of Regulation S-K) and requires public companies to disclose in their proxy statements whether diversity is considered in identifying nominees for the company’s board of directors, and if it is considered, how. Item 407 also requires that if a company has a policy with regard to the consideration of diversity in identifying director nominees, it needs to disclose how that policy is implemented and how its effectiveness is assessed.

The Advisory Committee believes that this existing disclosure requirement failed to generate information useful to stockholders, employees and customers in assessing board diversity. The Advisory Committee recommended that the SEC “amend Item 407(c)(2) of Regulation S-K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are diverse.” The Advisory Committee did not suggest using a specific definition of the term “diversity” and recognized that “the definition of diversity should be up to each issuer.” However, the Advisory Committee’s recommendation offered a clear disclosure enhancement by recommending that “issuers should include disclosure regarding race, gender, and ethnicity of each member/nominee as self-identified by the individual.”

The final recommendation of the Advisory Committee follows former SEC Chair Mary Jo White’s opinion on diversity disclosures. In her June 27, 2016 speech, Chair White stated that “[c]ompanies’ disclosures on board diversity in reporting under our current requirements have generally been vague and have changed little since the rule was adopted.” Chair White expressed her view that “the SEC has a responsibility to ensure that our disclosure rules are serving their intended purpose of meaningfully informing investors. This rule does not and it should be changed.”

It remains to be seen whether the SEC will propose new diversity disclosure requirements based on the Advisory Committee’s recommendation.

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