The SEC Announces Diversity in the Corporate Board Room . . . Kind Of
Even though we are a minority owned firm I have mentioned many times in this blog and my conversations and speeches that ABA does not believe in ethnic or gender consideration as a predictive qualifier to whether an individual is going to add value to an organization at a corporate board or advisory board level. ABA believes in "the right board members on the right boards for the right strategic reasons".
That last piece is critical and last I looked strategic thinking was not a specific trait of any particular ethnic background nor does it have any gender bias. We also do not believe in the "Old Boys Club" that many boards have become and that got many companies in the mess they are in. Those types of boards have proven not to provide shareholder value and it is hard to argue with data that shows that public companies with minority representation on their boards have fared better in stock price than those that do not. With that all said we were very surprised at the recent amendments approved by the SEC around diversity in the corporate board room.
On December 16th Securities and Exchange Commission Chairman Mary Shapiro announced that the SEC approved the recent proposals to rules enhancing Proxy Disclosure around a number of issues including amending the rules to require disclosure of factors considered by nominating committees when selecting an individual for a board position, such as diversity. I have heard from many individuals who are advocates for minority representation on Corporate Boards of Directors that this is exciting news and that the SEC is now requiring minority representation at the board level. As always with the SEC I caution those individuals to read the fine print. You would think with a woman as the Chairman of the SEC that this is exactly what was passed but the amendments are not exactly worded that way and it looks as though the lobbyists had a field day with this one.
If you listen to her comments and read the release (Final Rule: Proxy Disclosure Enhancements) the SEC DID NOT rule that companies must consider diversity in the board nomination process. Specifically what the SEC adopted were amendments to Item 407(c) of Reg S-K which would require disclosure of whether a company has a diversity policy AND IF SO (not required) how a nominating committee considers diversity in indentifying candidates. In addition, IF they have a policy they must disclose how it is implemented and how they assess the effectiveness of the policy. Since the ruling is worded the way it is and in this environment of a CYA mentality in most corporate board rooms I think most astute board members are going to recommend that they DO NOT have a public policy around diversity so as not to bring further scrutiny on that policy once it is required to be disclosed. Because the SEC is also requiring that companies assess the effectiveness of the policy and do not give any specifics on how to do that or parameters on what an effective policy looks like this can be completely open to interpretation and abuse and again subject to scrutiny and ultimately potential liability.
However, if you do have a policy and are worried about how you are going to get in compliance or if you are worried about keeping your "Old Boys Club" intact don't worry the SEC gave you lifeline. The SEC is going to let the companies come up with their own definition of "diversity". The SEC in all of its wisdom worded it this way:
"We recognize that companies may define diversity in various ways, reflecting different perspectives. For instance, some companies may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin. We believe that for purposes of this disclosure requirement, companies should be allowed to define diversity in ways that they consider appropriate."
Wow talk about a broad definition of diversity, I think we just went from having very little "diversity" on Corporate Boards of Directors in this country to almost every public company now being a member of the UN in one amendment. So those "Old Boys Clubs" need not worry since now if you can nominate board members who graduated from a different Ivy League school or who are members of a different country club then congratulations you are now a "diverse" board according to the SEC.
With all of the political and business considerations that need to be thought through in approving these regulations I do not admire the position that the SEC is put in. Having read the SEC's comments and all of the different union, business and investor groups that provided comments as well I can only imagine how difficult this is. In the end though with a definition this broad you have to wonder why it is even part of the regulations at all. I think organizations, management teams, shareholders and boards members would be better served by nominating "the right board members to the right boards for the right STRATEGIC reasons".
Bob Arciniaga
Managing Partner
Advisory Board Architects
