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Board Diversity: Why It Matters and How to Improve It

In an address last week, SEC Commissioner Luis A. Aguilar once again spoke out on the need for greater diversity on public company boards.  In particular, Aguilar covered three topics:

  1. The background and significance of the rule passed last year by the SEC which requires public companies to disclose how they view diversity with respect to their boards; 
  2. The initial disclosures from companies resulting from the rule which went into effect earlier this year; and 
  3. How to address the continuing issue of the lack of diversity on corporate boards.

New SEC Rule Regarding Diversity Policy Disclosure

Commissioner Aguilar stressed the need for fostering board diversity, and the Commission's belief that diversity on public company boards provides value.  The Commission chose to encourage boards to address diversity issues by requiring a certain level of disclosure about whether and how boards deal with diversity issues.

{T}he facts concerning the diversity of corporate boards in the United States tell a dismal story. Simply put, women and minorities remain woefully underrepresented. For example, in 2008, the Alliance for Board Diversity compiled statistics about the composition of the boards of directors of Fortune 100 companies and found the majority of board members, 83%, were white men, and only 17% of the board seats were held by women and minorities.

Furthermore, this lack of diversity persists even though there are many studies indicate that diversity in the boardroom results in real value for both companies and shareholders.

 . . .

The calls from investors requesting information about board diversity resonated with me and I worked with the SEC staff to seek more formal input as to whether investors and other market participants required greater information regarding diversity in the boardroom. In response to this request the Commission received a deluge of comment letters. These letters were overwhelmingly supportive, with approximately 90% of those addressing the topic expressing support for disclosure of information related to race and gender diversity on the board.

 . . .

Accordingly, last December, the Commission, for the first time, adopted a rule to assess a company's commitment to developing and maintaining a diverse board. Specifically, the rule now requires a company to disclose:

  • whether diversity is a factor in considering candidates for nomination to the board of directors; 
  • how diversity is considered in that process; and 
  • how the company assesses the effectiveness of its policy for considering diversity.

The Initial Response by Companies to the Diversity Policy Disclosure Rule

Because disclosure about board diversity was requested by investors, Aguilar and the Commission's staff stressed to filers that they should prepare the disclosure with an eye toward it being useful to investors.

In describing how diversity is considered in identifying director nominees, companies should focus on the concrete steps taken to develop a slate of diverse candidates for a position. For example, the disclosure might indicate whether the company has a policy of:

  • interviewing one or more candidates who are a minority and/or a woman; 
  • retaining a search firm that has been specifically instructed to seek candidates that are minorities and/or women; and/or 
  • soliciting recommendations from organizations that have a reputation for identifying candidates with diverse backgrounds.

. . .

Useful disclosure also could highlight the diversity of the existing board of directors, which would shed light on the effectiveness of the company's board diversity policy even if the information was provided in the aggregate and did not specifically identify any particular directors.

Diversity in Corporate America: The Way Forward

Following a discussion of the NFL as an example of an organization that has taken concrete steps toward considering diversity amongst its coaches and principals, Aguilar offered some advice of his own toward increasing diversity in the board room.  

I encourage companies to prioritize and implement practices to increase board diversity. To do this, it is imperative to have processes in place to be able to identify diverse candidates. For example, a nominating committee should follow policies and procedures that require the proactive development of a diverse slate of candidates in advance of a board opening becoming available. In today's environment, diversity in the boardroom is a business necessity that companies need to take seriously.

I personally believe that companies that expand their search for new directors to include more women and minorities will find a breadth and depth of talent that will serve to improve their performance and increase the wealth of their investors.

The full text of Commissioner Aguilar's November 4, 2010 speeche is available at:  http://www.sec.gov/news/speech/2010/spch110410laa.htm