It’s not just mandatory climate disclosure that’s on the agenda for Acting SEC Chair Allison Lee. Last week, as reported by Reuters, in remarks to a forum for securities industry professionals, she said that the SEC “should think more ‘creatively and broadly’ about tackling issues of race and gender diversity, including by potentially revisiting public companies’ disclosure requirements.” In the past, Lee has not hesitated to emphasize her concerns about the absence of prescriptive requirements in rulemakings that would have more certainly elicited disclosure regarding diversity. (See, for example, her statement regarding amendments to Reg S-K as well as her remarks to the Council of Institutional Investors, Diversity Matters, Disclosure Works, and the SEC Can Do More.) Now that she has directed Corp Fin to focus on climate disclosure, will diversity be next?
In her remarks, in addition to revisiting diversity disclosure requirements for public companies, Lee added, the SEC should also consider “strengthening guidance on board diversity in an effort to address a lack of diversity…in corporate boardrooms.” In addition, she suggested that “the SEC could also look at ways to better evaluate the impact of SEC rules on gender and racial discrimination and work to bring more diverse perspectives in their public outreach. ‘We should think more broadly and creatively and pursue every opportunity we have to pursue diversity and inclusion,’ Lee said.” Time will tell whether Lee’s inclination toward more prescriptive diversity disclosure takes the same course as her recent direction to Corp Fin to intensify its focus on climate. (See this PubCo post.) Given the SEC’s recent amendments to Reg S-K adding a principles-based requirement for human capital disclosure (see this PubCo post), it would not be surprising to see Corp Fin staff intensify their review and comment on the most recent round of human capital disclosures as part of the normal disclosure review process. As with climate, that review could be the springboard to additional guidance or rulemaking that the SEC may now view as necessary to elicit the optimal level of diversity disclosure.
And some companies are providing enhanced diversity disclosure. According to the WSJ, large U.S. companies “are giving a more detailed picture of diversity in their ranks, with dozens of them publicly sharing gender or race breakdowns, many for the first time.” In addition to a “nudge” from the new SEC rule, the disclosures “also reflect a new focus among many companies on workforce diversity following last summer’s protests over discrimination, racial inequity and the death of George Floyd while in police custody.” According to a study by the WSJ of over 160 annual reports for 2020 filed by companies in the S&P 500, although about 100 companies “chose to say little about demographics,” still, “about a third included diversity disclosures, though the details varied widely. Most provided a tally of women in their workforces. Almost three-quarters disclosed at least some information on racial and ethnic diversity—often a combined count of nonwhite employees. A few provided data on veterans, younger or older workers, people with disabilities and those who identify as gay, lesbian or transgender. Some provided figures only for their corporate boards.” The article observes that, in addition to the SEC rule, some workforce diversity disclosure was made in response to pressure from institutional investors, some of which use the data to develop their rankings or to make investment decisions. In support, some investors cite “data collected by McKinsey showing [that] 25% of companies with the least diversity by gender and race are more likely to financially underperform industry averages.” A number of companies have also committed to make public the diversity data they privately report to the EEOC. One commentator cited in the article indicated that the enhanced disclosures “help add substance to pledges by many executives last year to give priority to diversity….’Transparency leads to greater accountability,’” she observed. The article also notes that, if approved by the SEC, the new Nasdaq diversity proposal, which includes a disclosure component, could accelerate a move toward increased diversity disclosure.