The SEC Wants New Rules For Board Diversity—Here’s Why That Matters

January 29, 2016, 7:29 PM UTC
SEC Chair Mary Jo White
SEC Chair Mary Jo White
Photograph by Andrew Harrer — Bloomberg/Getty Images

On Tuesday, Securities and Exchange Commission chair Mary Jo White said that her staff is reviewing the agency’s current rules for disclosing boardroom diversity—which may lead to new guidelines.

Unless you’ve been following the debate over how companies reveal the role that diversity plays in their selection of new board members, the implications of White’s remarks—which were first reported by the Wall Street Journalmay not be entirely clear.

Here’s a look at the SEC’s current policy—and what a rule change could mean for future of women and underrepresented minorities serving on boards.

The current rules:

Since 2009, the SEC has required public companies to reveal whether and how they consider diversity in identifying director nominees. If boards have a diversity policy in place, they must also disclose how that policy is implemented, and how they assess its efficacy. The rule is meant to help investors with investment and voting decisions.

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Why critics don’t like them:

Some have questioned whether the current rules are strong enough, and “whether they really are giving [enough information to] investors who are interested—and many are—in the racial, ethnic and gender diversity of boards,” White said, speaking on stage at the Securities Regulation Institute in Coronado, California, according to someone familiar with the conference.

A December 2015 report from the Government Accountability Office noted that many companies include such characteristics as relevant knowledge, skills and experience when defining diversity. Under such a broad definition, a company might classify a board candidate as “diverse” solely based on what industry he works or has worked in. As a result, the SEC’s current rule “may not yield useful information,” the report says.

At the Coronado event, White said that the current SEC rules don’t define diversity “because obviously diversity can mean a lot of things.” She said the agency has received petitions urging it to offer a more explicit definition.

What might new rules look like?

One petition, submitted by public fund fiduciaries in March 2015, encouraged the SEC to require that companies disclose each director nominee’s gender, race and ethnicity, in addition to their skills and experiences, in a chart or matrix format.

Anne Simpson, director of global governance for the California Public Employees Retirement System—and one name on that petition—said in an email that board diversity is “vital to board effectiveness.”

“We learned a painful lesson in the financial crisis that ‘group think’ is hazardous,” she added. “We need diversity because investors are protected when boards bring challenge and a variety of perspectives to critical issues. We also need diversity because boards which confine their recruitment to candidates who look and think like the incumbents are missing out on talent and ability which can drive the company’s success.”

Why does this matter?

White’s comments in Coronado come shortly after GAO reported that women hold roughly 16% of board seats, and may not reach the 50-50 mark until more than 40 years from now. White cited those statistics, along with findings that diversity on boards makes them function better.

The GAO report also outlines how other countries are addressing gender diversity in the boardroom. It notes that Germany requires that 30% of board seats at certain public companies go to women. In Norway, it’s 40%. Meanwhile Australia and Canada require companies that do not comply with government-suggested approaches to board diversity to explain themselves.

As Simpson puts it: “Change in boardroom composition is moving at a glacial pace in the USA, which is now behind the curve internationally. Investors need full and frank disclosure on board composition, and currently we are peering into a dimly lit arena.”

What’s the next step?

White said that she personally believes the petition’s concerns are “well-founded,” and that her staff is now examining disclosures under the current rule—and what they’ve been over time—“with an eye towards…whether we need additional guidance or rulemaking.”

While she didn’t specify a timeline for possible changes, the first step would be to make a proposal available for public notice and comment—usually for 30 to 60 days—before adoption.

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