Many prominent shareholders, such as institutional investors and private equity firms, are putting pressure on the companies they own to report on the diversity characteristics of their board members and to increase the number of women and other groups on their boards. And many companies are responding to this pressure, creating roadmaps to improve their board diversity.
To find out how companies are currently approaching the issue of board diversity, Toppan Merrill commissioned Mergermarket to speak with three leading experts as well as one public company executive.
Toppan Merrill question: Companies are increasingly being pressured to disclose personal characteristics of their board members to make it possible for investors to evaluate their diversity, and some have expressed concern about potential problems with such a requirement. What do you think about this criticism? Is it justified in your opinion, and if so, how do you think it could be addressed? Leading industry experts weigh in...
Naz Zilkha, Dechert says: This is an important issue, and I think the recent SEC guidance is helpful in understanding how this will ultimately play out. It’s true that dealing with diversity and describing these types of attributes for individuals is personal.
What the SEC has said is that they understand that boards may or may not consider diversity as part of their nominating criteria and policies – but if they do, then it's important to describe that in their proxy statements. Given privacy concerns, it seems clear that companies will need to obtain consent from board members to describe their personal attributes before disclosing their level of diversity.
Another key issue is how a board verifies self-identified characteristics of their board members. If someone says they are a particular nationality, does a board simply take that on faith? Are they going to start DNA-testing or some other means to test ethnicity? Some observers have wondered whether there are potential liability issues if companies make statements about their board members that turn out to be inaccurate. At the end of the day, I think some of these concerns may be overblown, but I think there is definitely a desire by companies to be more transparent about the diversity of their boards and at the same time avoid potential problems inherent in increased disclosure.
Lori Zyskowski, Gibson Dunn adds: I have clients who have told me their directors do not want their personal characteristics disclosed with respect to them individually, because it is a privacy issue. As Naz mentioned, the SEC came out with a new C&DI in February that said companies should look at individual diversity characteristics that have been self-disclosed. When disclosing those personal diversity characteristics, I think it’s a question of getting approval from each individual if you're going to do it on an individual basis. Many companies have done pie charts showing the gender or racial characteristics of their boards in aggregate, but when you're showing them on an individual basis, I think that has many more privacy concerns attached to it.
One perspective that I think exists among some directors is that they don't want to be perceived as having been chosen for a board solely because they are of a particular race or ethnicity, or solely because of their gender. These are very highly qualified people who deserve to be on these boards, and they don't want it suggested that the only reason they were given the role is because of a diversity characteristic.
So if companies do gather this information, they need to be respectful of their directors' privacy and clearly note that providing such information is optional on the part of the director, and companies need to obtain consent to actually disclose that information. One way that I've seen this work is through the director and officer questionnaire – directors fill out these questionnaires annually to provide various information that needs to be disclosed in the proxy statement as they're being nominated for reelection. And for companies using a questionnaire like that, I think that's the most effective way to obtain diversity information.
John Valley, Osler weighs in: Diversity disclosure in many cases relies on having individuals self-identifying, meaning a company can practically only disclose the information it receives from its board members. So diversity disclosure requirements will need to recognize this limitation and companies will need to think about how to balance the desire for ‘better’ disclosure with any privacy or other concerns that board members may have in this regard.
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