October 19, 2021

Volume XI, Number 292


October 18, 2021

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A Deeper Dive into Diversity: SEC's Advisory Committee Calls for Increased Board Diversity Disclosure

The SEC’s Advisory Committee on Small and Emerging Companies has recommended that the SEC require companies to describe in their proxy statements the extent to which their boards are diverse, and to disclose the race, gender and ethnicity of each board member/nominee as self-identified by the individual.1 The Advisory Committee’s recommendation anticipated by only a few weeks the concerns raised by some observers in the wake of this month’s IPO of Snap, Inc. (parent company to the popular social media app, Snapchat). Despite Snap closing its first day of trading with a better-than-expected valuation, market watchers noted Snap’s lack of board diversity. According to Snap’s public filings, one of its nine directors is a woman and one of its directors is racially diverse. Although the Advisory Committee’s recommendation would not result in any amendment to the proxy rules that would impact proxy statements this season, or at all, companies may want to be proactive and consider how the implementation of the Advisory Committee’s recommendation potentially would affect their disclosure.

Since 2009, the proxy rules have required companies to disclose how the board considers diversity when identifying director nominees. Specifically, Item 407(c)(2)(vi) of Regulation S-K requires a company to describe its process for identifying and evaluating director nominees, including whether and how diversity is considered in identifying nominees. A company is further required to describe how its policy (if any), of considering diversity in identifying director nominees is implemented and how the company assesses the effectiveness of that policy.

The Advisory Committee’s view is that Item 407(c)(2)(vi) has failed to generate enough useful disclosure for investors. Sara Hanks, Co-Chair of the Advisory Committee, provided us with her view of better diversity disclosure, noting that “The disclosure should provide a useful guide as to how the company and its board or nominating committee view diversity, and how diversity plays into decisions with respect to the board. Don’t just say that you have a person from each of the categories X, Y and Z, but say why that matters to the company.”

In addition, investors have demonstrated an interest in learning more about how companies consider the diversity of their boards. According to a 2013 press release from the Thirty Percent Coalition2, institutional investors submitted shareholder proposals urging 20 companies — each of which had failed to include women as director nominees — to adopt charter language supporting board diversity, and to institute a practice of including women and minority candidates on their boards.

The Advisory Committee’s recommendation notes that board diversity plays an important role in capital formation for small and emerging companies because board diversity has been associated with improved competitiveness and talent management, greater access to capital, more sustainable profits, and better relations with stakeholders. Such trends also have been confirmed by recent studies. For example, a 2015 study by McKinsey & Company3 found that companies in the top quartile for gender diversity were 15% more likely to have financial returns above their respective national industry medians. The study further found that there was a 0.8% increase in EBIT (earnings before interest and taxes) for every 10% increase in racial and ethnic diversity on the senior-executive team of a U.S. company.

Influential institutional investors also have voiced the importance of board diversity. For example, State Street Global Advisors recently called on companies to take steps to increase the number of women on their corporate boards. The California State Teachers’ Retirement System’s (CalSTRS) Corporate Governance Policy provides that CalSTRS may hold members of a nominating and governance committee accountable if sufficient progress has not been made to diversify a board after CalSTRS has engaged in a dialogue with that company about its lack of board diversity. Additionally, fund managers such as Morgan Stanley Investment Management and T. Rowe Price Associates support diversity proxy proposals that ask companies to specifically commit to seeking board diversity.

When asked about the Advisory Committee’s recommendation, former SEC Commissioner Luis A. Aguilar said “The Advisory Committee’s recommendation is yet one more example of the importance that many market participants put on the benefits that diversity brings to a board of directors. In particular, it is clear that investors who put their money at risk recognize that board diversity adds value to the companies that they own. I don’t see this issue going away and companies need to confront it.”

Although it is uncertain whether the Advisory Committee’s recommendation will be taken up by the SEC under the incoming Chair, companies may want to consider voluntarily incorporating more useful disclosure on existing board diversity and diversity initiatives. The SEC has taken measures to increase disclosure related to board diversity and investors have taken action to encourage it. Interest in disclosure regarding corporate board diversity has been expressed for almost a decade; the recent recommendation from the Advisory Committee and reaction to Snap’s board composition evidences that this interest certainly has not waned.

* Special thanks to Sara Hanks, Co-Chair of the SEC Advisory Committee on Small and Emerging Companies and CEO of CrowdCheck, Inc., and to former SEC Commissioner Luis A. Aguilar, for their contributions to this alert.

** Tarik A. Brooks, an associate in the Corporate and Securities Group, assisted in the preparation of this article.

1The Advisory Committee has recommended an amendment to Item 407(c)(2) of Regulation S-K. See “SEC Advisory Committee on Small and Emerging Companies ‘Recommendation Regarding Disclosure of Board Diversity,’” dated February 16, 2017.
2Press Release: “Institutional Investors file Shareholder Resolutions Encouraging Diversity in Company Charter Language and in the Corporate Boardroom,” dated February 28, 2013.
3“Diversity Matters,” by Vivian Hunt, Dennis Layton and Sara Prince of McKinsey & Company, dated February 2, 2015.

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume VII, Number 75

About this Author

Bonnie Barsamian, Drinker Biddle Law Firm, New York, Corporate and Finance Law Attorney

Bonnie A. Barsamian is a seasoned legal and business advisor with more than 25 years of experience advising public and private companies, investment banks, financial sponsors, executive leadership and boards of directors in complex securities/capital markets, mergers and acquisitions and other corporate transactional, advisory and regulatory matters.

Bonnie represents issuers, underwriters and financial sponsors in the full range of public and private securities offerings and other corporate finance transactions, including IPOs...

(212) 248-3188
Elizabeth A. Diffley, Corporate, Securities Attorney, Drinker Biddle, Law Firm

Elizabeth A. Diffley is an accomplished and pragmatic advisor to public and private clients on corporate and securities matters, including corporate governance, capital raising transactions, public company reporting and compliance, and mergers and acquisitions, as well as general corporate matters. Knowledgeable across a broad range of industries, Beth has particular experience advising insurance and other financial services companies on a variety of securities, mergers and acquisitions, governance and general corporate matters.

JR Lanis, Securities Attorney, Drinker Biddle

JR Lanis assists clients with public securities offerings and reporting, private equity and venture capital financings, mergers and acquisitions, and fund formation and representation. He structures, negotiates and closes multimillion and billion-dollar transactions, including public stock and debt offerings, tender offers, distressed company acquisitions and sales, mergers, licensing and other commercial arrangements, for both buyers and sellers. He also serves as outside counsel to several registered investment companies.


Marc Leaf, Corporate lawyer, Drinker Biddle

Marc A. Leaf is Regional Partner in Charge of the New York office of Drinker Biddle, and a trusted counselor and adviser to senior government officials, corporate leaders, and independent directors. An experienced and practical dealmaker with a proven record of success, Marc helps issuers and investors in technology, media, telecom and other industries achieve their goals in capital raising transactions, business combinations, and joint ventures.

Prior to joining Drinker Biddle, Marc served on the Executive Staff of the U.S....

Douglas Raymond, Securities Attorney, Drinker Biddle Law Firm

Doug Raymond has 30 years’ experience advising clients on mergers and acquisitions, securities offerings and joint ventures. He focuses on understanding his clients' businesses and industries, their objectives and how to achieve them most effectively. He is dedicated to helping his clients accomplish their goals effectively and efficiently. Doug is a managing partner of the firm and served as chair of the Corporate and Securities Group for more than 10 years.

Doug works extensively on matters of corporate governance for both public and private...