The SEC, Corporate Governance, Disclosure and Social Policy: Diversity in the Board Room

By Priya Cherian Huskins of Woodruff-Sawyer & Co.

The Securities and Exchange Commission’s mission is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. Some of the SEC’s tools include its ability to weigh-in on issues of corporate governance and to drive change both through mandates and required disclosures.

To be sure, corporate governance means different things to different people. For example, when someone uses the term “corporate governance,” are they talking about loss control? Are they talking about optimizing the efficiency of how a board does its job? Are they talking about enhancing shareholder returns? Or something else?

Let’s briefly look at different types of corporate governance and how this relates to the latest statements by SEC Chair Mary Jo White on boardroom diversity.

Corporate Governance and Loss Control

There’s a type of corporate governance that’s focused on loss control. For example, when we refer to corporate governance in the D&O liability insurance practice here at Woodruff-Sawyer, we are generally referring to controls and procedures in the management environment that make litigation and loss less likely, or that reduce the severity of loss should it occur.

A robust insider trading policy is a good example of a loss-control related corporate governance policy.

Corporate Governance and Shareholder Return

Corporate governance can also refer to procedures and policies that tend to enhance shareholder returns.

A good example of this is a policy requiring that only independent directors serve on compensation committees. Such a policy makes it harder for management to implement too-easy metric benchmarks for bonus payments. The harder the benchmarks (within reason), presumably the better the returns for shareholders.

Corporate Governance and Social Policy

Finally, the term corporate governance is sometimes used to refer to social policy concerns. Some of these policies might be expression of a serious issue that is worth addressing in the appropriate forum. The SEC typically uses disclosure when it is making social-policy related corporate governance moves. For example, the SEC uses required corporate disclosure about the use of conflict minerals to discourage their use.

This type of corporate governance is not, however, really about loss control or enhancing shareholder returns. Any particular social policy might not detract from the other goals of corporate governance, and may even indirectly support them, but social policy-type corporate governance arguably falls outside of the SEC’s mission to “protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation”

The SEC’s Focus on Board Diversity

SEC Chair Mary Jo White gave a keynote address on June 27, 2016, at the International Corporate Governance Network Annual Conference in San Francisco.

There, she recognized the lack of diversity in corporate board rooms today and took a clear stance on the social issue of board diversity: “I continue to urge that CEOs and boards of public companies act aggressively to alter this landscape and to do so quickly.”

As a reminder, there’s already a disclosure rule (Item 407(c)(2)(vi) of Regulation S-K) in place that requires public companies to describe how they “consider diversity in identifying nominees for director.” The results of this rule, according to Chair White, have been lackluster:

The role of the SEC on board diversity, as on many other important corporate governance issues, is focused on disclosure. The SEC does not have the authority to mandate board diversity, but, in 2009, the Commission adopted a rule requiring companies to disclose whether, and if so, how their nominating committees consider diversity and, if they have a policy on diversity, how its effectiveness is assessed … Very few companies have disclosed a formal diversity policy and, as a result, there is very little disclosure on how companies are assessing the effectiveness of their policies.

She followed up by stating the intentions of the SEC’s future role in board diversity—a new rule:

I announced in January that I had directed the SEC staff to review our rule and the extent and quality of disclosures that have followed, with an eye toward revising the rule if there was a need. And, I can report today that the staff is preparing a recommendation to the Commission to propose amending the rule to require companies to include in their proxy statements more meaningful board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors.

This may come as a surprise since, in the past, Chair White had criticized efforts by partisans to use the SEC to drive forward social policy mandates “effectuate social policy or political change through the SEC’s powers of mandatory disclosure,” according to The Wall Street Journal. In a 2013 speech Chair White was critical of Congresses’ meddling in social issues via the SEC’s disclosure powers, saying specifically that while some of the social policy goals were laudable, “as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.”

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