SEC Staff Issues New Guidance on Board Diversity Disclosures

The staff of the U.S. Securities and Exchange Commission recently issued new Compliance & Disclosure Interpretations (116.11 & 133.13) encouraging public companies to provide details on how they consider diversity when making decisions regarding the makeup of their boards of directors. 

Highlights:

• Guidance applies to disclosure regarding diversity characteristics of board members or nominees in proxy statements or other SEC filings.
• Limited to those characteristics the individual self-identifies and that are considered by the board or nominating committee.
  
• Applies only if the individual has consented to the company’s disclosure of those characteristics.
  

The SEC’s Division of Corporation Finance issued new interpretative guidance regarding Item 401 and Item 407 of Regulation S-K to clarify when “self-identified diversity attributes” of directors and director nominees should be disclosed in public filings. 

The SEC staff stated that when a board member or nominee provides the company with diversity characteristics “such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background” which are considered by the company’s board or nominating committee in determining that the board member or nominee should serve as a director of the company, the SEC staff expects the company to identify those characteristics and how they were considered. This discussion would be applicable to any filings that include disclosures under Item 401, such as proxy statements for director elections. Similarly, when a public company discusses its process for identifying director candidates under Item 407, it should disclose how self-identified diversity attributes are considered “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.” 

The new guidance comes amidst a larger trend towards putting regulatory or statutory muscle behind efforts to increase board diversity. For example, a bill styled as the Improving Corporate Governance Through Diversity Act of 2019 has recently been introduced in both houses of Congress (H.R. 1018; S. 360) which would require public companies to disclose the gender, race, ethnicity and veteran status of their directors, director nominees and senior executive officers on an annual basis. At the state level, the governor of California signed legislation into law in September 2018 that will require public companies headquartered in California to have at least one female director by December 2019, as discussed in a prior OnPoint. With these government initiatives proceeding on many fronts in tandem with a push by institutional investors and proxy advisors for improved director selection processes and disclosures, we expect that public companies will increasingly consider self-identified diversity attributes as part of their board composition discussions. Companies may also wish to review their director questionnaires in light of continuing developments in this area.