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Wall Street Avoids Board Diversity Mandate in Modest Bill (2)

May 11, 2021, 8:46 AM; Updated: May 11, 2021, 10:51 PM

Investors may have enough clout to gain passage of a bill in Congress that would finally give consumer advocates more insight into how diverse Wall Street boardrooms are.

But while the bill is a step in the right direction, advocates say, it’s still an open question whether it will—or can—substantively catalyze change.

A measure (H.R. 1277) championed by New York Democratic Reps. Gregory Meeks, Carolyn Maloney, and Sen. Bob Menendez (D-N.J.) would require companies to disclose the racial, ethnic, and gender makeup of their boards and executive officers to the Securities and Exchange Commission.

While the information is sometimes already public, it’s not aggregated or explicitly reported in proxy statements or quarterly financial reports. It’s also challenging to independently verify, and the data isn’t easily accessible. Bloomberg has collected diversity data on the nation’s largest companies, and 90 of the 100 surveyed corporations said their boards include a member from an underrepresented background.

The bill would require companies to post their numbers in proxy statements or annual reports. Critics say the measure, which has no enforcement mechanisms, diversity hiring goals or requirements, is unlikely to spur the kind of change the bill’s authors would ultimately like to see.

“All of the reporting in the world can take place, but if there’s actually no change, it’s going to be insufficient,” said Julie Nelson, the senior vice president of Race Forward, a racial justice non-profit.

The legislation is making its way through Congress as Corporate America has pledged commitments to increasing equal employment opportunities after the murder of George Floyd and increased instances of violence against Asian Americans. It also joins other initiatives aimed at increasing corporate board diversity, like a California law that requires a minimum number of minority members on corporate boards and a similar proposal put forth for all Nasdaq-listed companies.

“I’m not holding out the legislation as a panacea that’s going to change corporate diversity in America overnight upon it being signed by the president,” Menendez said in an interview. “But I do think it is a major catalyst in getting both companies to disclose—as a result of that, they’re going to have to think more keenly about what that picture will look like.”

The diversification effort may get a boost from the SEC itself even without the legislation. Newly confirmed SEC Chair Gary Gensler said he asked agency staff to make recommendations about how to get companies to disclose board-diversity data.

Investors “increasingly want to understand these particular issues around diversity and more broadly human capital, both. And it’s driven by what investors want to see and I’ve asked staff to try to serve up some suggestions on this,” Gensler said at a May 6 House Financial Services Committee hearing, a committee where Maloney and Meeks hold senior positions.

While the measure passed the House in the last Congress with 55 Republican votes, it could have a tougher time in the Senate without Republican support.

Menendez said he hopes to hold a hearing soon on the bill in the Securities, Insurance, and Investment subcommittee he chairs.

But Sen. Tim Scott (R-S.C.) ranking member of the subcommittee, believes “onerous federal mandates” aren’t the right path to increasing corporate diversity, according to a spokesperson, and that “voluntary reporting of diversity data is the correct path.”

“Senator Scott has been at the forefront of the push for greater corporate diversity. As recently as this March, he hosted a corporate diversity listening session with C-suite executives from seven Fortune 100 companies to share with their peers best practices for advancing diversity in the workplace,” the spokesperson said.

Business-Backed Measure

The bill has bipartisan support and the backing of corporate groups that represent the biggest companies in the U.S., including the Financial Services Forum, Business Roundtable, and U.S. Chamber of Commerce.

Tom Quaadman, executive vice president of the Chamber’s Center for Capital Markets Competitiveness, said increased disclosure for investors is a benefit, and it allows for “market-driven change to happen.”

“What’s actually going on is you’re already having the private sector having those discussions and beginning to move in the right direction without those government mandates,” he said. “This is forcing businesses to interact with their investors on these issues.”

A 2020 California measure, in contrast, takes a more rigid approach, requiring boards to have a minimum number of women and people of color, as opposed to merely reporting data on board members’ demographics. A 2018 California law required at least one woman on corporate boards in the state. That law has been challenged in court.

Regulating corporate governance has traditionally been the purview of the states, not the SEC, according to Jeffrey Hochman, a partner with Willkie Farr & Gallagher in New York. He said both the bill and a comparable Nasdaq proposal “fit more in the traditional SEC model, but I think both would go a long way in achieving substantive goals.”

New York’s Maloney agreed: The bill’s goal isn’t to mandate that companies increase diversity or force boards to meet quotas, but to make investors—and consumers—aware of who is leading public companies.

“Strict mandates are usually not popular or supported in our country, that’s why I made it transparency, which I think is very fair. Because investors want to know—they’ve been asking for this information,” she said in an interview. “Companies should give it to them; and if they refuse to give it, I think that people might reconsider investing in the company.”

Investors Push Diversity

Some investors are trying to use existing law to make corporate boards live up to their lofty promises to improve diversity. Shareholders have filed at least 10 diversity-related derivative suits in federal courts since last summer, alleging breaches of fiduciary duty. So far, they haven’t been winning.

The suits typically bring up company statements about the importance of racial diversity, then point to mostly White corporate leadership as evidence the businesses are all talk. Some complaints specifically ask courts to provide relief in the form of requiring companies to add members of minority groups to their boards.

Facebook Inc., Monster Beverage Corp., and Gap Inc. all convinced federal judges to dismiss—at least for now—diversity-related shareholder derivative complaints against them in March and April. Investors in all three cases have the option to try again, although some of their claims will have to go to a different court.

Micron Technology Inc.—which is facing a derivative suit of its own—argued that the cases might backfire on investors hoping for more diversity. The suits, some of which rely in part on business-provided workforce diversity data, “target” companies that have already “been transparent regarding representation in their workforce,” Micron said in an April motion to dismiss.

Holes?

While the congressional measure would provide more insight into how diverse boards are, it leaves enforcement up to the SEC to keep tabs on companies’ disclosures.

The benefit of a formal collection of this data is being able to study it over time, said Bartlett Naylor, a financial policy advocate for Public Citizen, a consumer advocacy group.

“If it’s enumerated, we know year-to-year what the changes are,” he said.

But the bill doesn’t explicitly spell out what happens if a company opts not to submit, or is late reporting the data. It also relies completely on board members self-identifying their race, ethnicity, sex or gender, and veteran status. If a member declines to self-identify, there is no provision in the bill prohibiting it.

Section 13 of the Securities Exchange Act, however, does give the SEC “plenary authority to investigate and enforce any violation of the securities law,” which would include failing to report information, according to Georgetown University Law Center professor and SEC enforcement expert Urska Velikonja.

“If you don’t disclose or if you disclose falsely, it could give rise to liability,” she said.

And the lawmakers all said in interviews that enforcement is implied in their bill, and that the SEC would take reins even without explicit directions from Congress.

Meeks said that the agency’s Advisory Committee on Small and Emerging Companies requested in 2017 that the SEC require “enhanced” diversity disclosure. “It seems to me that everyone is leaning in that direction that we should be able to get this across the goal line, it should be a touchdown,” he said.

While data about the makeup of boards will be illuminating, it doesn’t force or give companies incentives to stop hiring board members who are White or male or both. Maloney said the hope is that companies will organically change their practices once disclosures are made, coupled with overwhelming evidence from studies that show company performance improves with more diverse boardrooms.

But until companies are given reason to change, data isn’t enough, Race Forward’s Nelson said.

“The hesitation on legislation where there is no carrot, no stick—it just becomes check the box,” she said. “We report on it, and then we go back to business as usual.”

(Updated to add Sen. Tim Scott's comments beginning at paragraph 13. A previous version of this story was corrected, at paragraphs 7 and 14, as well as in the accompanying chart, to reflect existence of two California board diversity measures.)

To contact the reporters on this story: Paige Smith in Washington at psmith@bloomberglaw.com; David Hood at dhood@bloomberglaw.com; Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editors responsible for this story: Patrick L. Gregory at pgregory@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com

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