Improving a Different Type of Disclosure: Reporting Corporate Board Diversity

Our attention and commentary with respect to disclosures is generally related to financial reporting. However, an element of SEC Commissioner Luis A. Aguilar’s speech, and the panel discussion which followed on diversity in boards and the C-suite, at the Women’s Executive Circle of New York luncheon on May 22^nd seemed a disclosure detour worth taking.

In 2009, the SEC passed a rule requiring public companies to make a disclosure regarding how diversity is incorporated into the process by which director candidates are considered for nomination to a company’s board of directors. In explaining the basis for the addition of this disclosure, the rule notes the importance of such information to investors:

A significant number of commenters responded that disclosure about board diversity was important information to investors.Many of these commenters believed that requiring this disclosure would provide investors with information on corporate culture and governance practices that would enable investors to make more informed voting and investment decisions. Commenters also noted that there appears to be a meaningful relationship between diverse boards and improved corporate financial performance, and that diverse boards can help companies more effectively recruit talent and retain staff.

Commissioner Aguilar’s speech and the ensuing panel discussion raised the question of whether the existing rule goes far enough. Presently, companies are not required to disclose the diversity of the company’s actual board. The rule only requires disclosure of how diversity, which can be defined by the company, is considered in the nominating process. Diversity of the company’s board for many organizations must be gleaned from the names, and possibly pictures, of the directors in the company’s public documents.

The importance of this disclosure to investors — as articulated in the basis for the SEC’s decision to add the existing rule and the numerous citations in Aguilar’s speech which illustrate the positive relationship between diversity and returns — suggests this is a disclosure worth including in proxy statements. Given the readily available nature of the information to the company it can be included with virtually no incremental cost.

Some intimate that companies may not want to make the disclosure because the statistics may not portray a diverse picture. For example, only 17% of board seats of the largest U.S. publicly traded companies are occupied by women. What we have learned in our years in commenting on financial reporting disclosures is that what gets disclosed is what gets managed. To that end, requiring the disclosure may help bring greater attention to an issue which investors see, if addressed, as having a positive correlation with improved returns.

The dialogue was an interesting detour from our traditional conversation regarding disclosures and something we thought you might find of interest.

See additional commentary on board diversity in Europe.