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SEC Chair Gary Gensler has indicated that when the commission considers issuing a proposal that would require public companies to provide more information related to human capital management, it will likely cover the diversity of their executive officers.

Diversity data of the rank and file is likely to be included, too.

The SEC’s rulemaking agenda has two separate but related projects: human capital management disclosure and corporate board diversity disclosure.

“Ever since the 1930s, there’s been a basic bargain that investors get to decide about their investments up or down or voting yes or no, but companies need to provide full and fair disclosures,” Gensler said in response to a question at a conference hosted virtually by the Council of Institutional Investors on Sept. 22, 2021.

“And over the decades, that shifted, starting with the basic financials. Later on a lot of things were added like management’s discussion and analysis, executive compensation, risk factors and the like,” he said. “I think in the 2020s, there’s categories that investors such as your members are really calling for.”

CII Executive Director Amy Borrus, who asked Gensler the question, noted that the SEC in August approved a Nasdaq Stock Market LLC proposal designed to foster more diverse boards at its listed companies amid a nationwide dialogue about racial equality and benefits of diversity over the past year. It requires diversity disclosures.

“Do you expect the commission to build on that by proposing board and perhaps executive officer diversity disclosures for all U.S. public companies?” Borrus asked.

“I have asked staff to do just what you said to serve up to our five-member commission recommendations around human capital disclosure, as well as board diversity as you mentioned,” Gensler responded. “In addition, also I think you will probably be asking about climate risk disclosure, cyber disclosures. But these are things that investors are really calling upon.”

Gensler said that when he was at investment bank Goldman Sachs Group, Inc., he started in the merger and acquisition (M&A) area.

“We would write up prospectus to sell a company—a private company or even a public company—we would have a lot of details about the human capital, the pay raise, the turnover, the workforce—part time full time—and these days, also really important, diversity statistics… and the like,” he said. “I think the public can benefit, investors can benefit. We will put it out for public comment.”

As for timing of rulemakings, he said stay tuned between now and next spring.

Human capital management disclosure rulemaking

On workforce management disclosure, the SEC in August 2020 did adopt a rule but left it principles-based based on the concept of materiality in Release No. 33-10825, Modernization of Regulation S-K Items 101, 103 and 105.

The commission is redoing it because many investor advocates said they want more detailed and line-item disclosure requirements.

Board diversity disclosure rulemaking

In terms of the board-level disclosure requirement that Gensler mentioned, the SEC in December 2009 issued Release No. 33-9089, Proxy Disclosure Enhancements, which requires companies to disclose the extent to which they consider diversity in selecting board candidates. However, some large pension funds later on told the commission that the rules do not provide enough information and stick investors with the extra work of researching nominees’ backgrounds independently.

After Mary Jo White became the chairman in 2013, the commission had been working on a rule proposal to require more disclosures about the diversity of directors and nominees but was not able to do so because time was running out with the 2016 presidential election nearing. White had said that she considers diversity “enormously important.”

The chairman sets the commission’s rulemaking agenda. And Jay Clayton, who took over the SEC in 2017, shifted the agency’s priorities to largely focus on scaling back regulatory requirements to encourage more companies to go and stay public, and he put corporate diversity on its long-term agenda. Items that are relegated to long-term action usually do not get priority or are silently dropped over time.

However, in February 2019, the SEC staff updated interpretive guidance to encourage disclosure when board members or nominees voluntarily reveal their race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background.

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