Commissioner Peirce criticizes investor push for disclosures about board members’ personal background

Securities and Exchange Commission (SEC) Commissioner Hester Peirce told a group of institutional investors that she does not agree with their push for disclosures about corporate board members’ personal characteristics.

“Our corporations, along with the rest of our institutions, benefit from being able to draw from a population that is rich in its diversity,” Peirce said in a speech at the Council of Institutional Investors (CII) Spring 2019 conference in Washington on March 5, 2019. “I am simply worried that making directors’ personal characteristics an item of expected disclosure may have unintended consequences, among them invasion of board members’ privacy and an undue focus on personal features that may have little relation to talent as a director.”

CII represents pension funds, foundations and endowments with combined assets exceeding $4 trillion.

In particular, Peirce said she is concerned about the SEC staff’s recent update to interpretive guidance that clarifies disclosures about board diversity in response to investor demand.

The staff in February inserted a new item to the Compliance and Disclosure Interpretations (C&DIs): Regulation S-K related to Subpart 400 of Regulation S-K, which is a set of rules covering information outside the financial statements that companies must provide in their periodic reports and public offerings. Subpart 400 deals with information related to executive pay, board director qualifications and other corporate governance matters. The update deals with what a public company must disclose when certain board members or nominees voluntarily provide to the company specific information about their race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background.

Investors and some Democrats on the Capitol Hill in the past several years have sought greater disclosure about a board members’ race, gender and ethnicity. They believe a more diverse board benefits the company over the long-run, but many public companies have lagged in increasing women and minority representation in their boards, or companies have not been providing adequate information about the makeup of their boards.

Currently, Reg S-K does not require companies to provide such detailed information about a board member’s personal background. The rules as described in the SEC’s December 2019 Release No. 33-9089, Proxy Disclosure Enhancements, require, among other things, companies to disclose the extent to which they consider diversity in selecting board candidates. However, some large pension funds told the SEC that the rules do not provide enough information and stick investors with the extra work of researching nominees’ backgrounds independently.

Moreover, they said the disclosure rules have not increased diversity on corporate boards, which many investors say they want.

“Despite the emphasis on self-identification [in the staff guidance], I worry that this staff ‘expectation’ will work with other pressures to force reticent board members and nominees to divulge personal details they would prefer to keep private. I hope that I am wrong,” Peirce said.

“A person who does not want to share his sexual orientation, religion or ethnic background with the world may face pressure to do just that in order to allow the company to get ‘credit’ for having a diverse board,” she said. “What happens when a person decides to convert to a different religion or discovers that she has a different ethnic or cultural heritage than she previously understood? Would these changes require her to notify the board for potential reconsideration of her board membership? Will decisions that are, for some people, of an intensely personal nature suddenly become the stuff of 8-Ks?”

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