Letter to Jay Clayton, Chairman of the Securities and Exchange Commission - Rep. Meeks Sends Letter on Improving Corporate Board Diversity Disclosures to SEC Chair Jay Clayton

Letter

Dear Chairman Clayton:

As Members of Congress, we look forward to working with the Securities and Exchange Commission (SEC) to ensure investors are protected and are well-informed about the companies they invest their hard earnings in.

As you develop your office's policy agenda, we request that you consider improving the SEC's 2009 corporate board diversity rule (the "Rule"),[1] which has since proved inadequate. The Rule requires public companies to disclose the extent to which they consider diversity when nominating and selecting board directors. However, the Rule does not define what the SEC means by "diversity" and it gives companies too much discretion on what they report. The Rule's shortcomings have led to disclosures that are vague and of nominal use despite demands from various stakeholders for more robust reporting.

Investors have led the call for more comprehensive and useful information on corporate board diversity. On March 31, 2015, nine public fund fiduciaries -- totaling over $1 trillion in assets -- submitted a rulemaking petition to the SEC expressing concerns with the current rule and providing recommendations on how the SEC can improve it. These investors stated that "the current disclosure rule makes it difficult for shareholders to determine the racial and ethnic diversity of boards" and recommended that, at minimum, the SEC require companies to share the gender, race, and ethnicity of board nominees in a chart or matrix form.

Business leaders have also acknowledged the benefits, and minimal burden, of requiring more robust corporate board diversity disclosures. On February 16, 2017, the SEC's Advisory Committee on Small and Emerging Companies (ACSEC) acknowledged that although board diversity has been associated with "improved competitiveness" and "more sustainable profits," the current rule has "failed to generate information useful to stockholders, employees, and customers in assessing board diversity." As a result, ACSEC -- which represents the interests of small businesses -- recommended that the SEC require companies to include specific disclosures about the self-identified race, gender, and ethnicity of their board members and nominees.

Former SEC commissioners have recognized the need to improve the Rule. As early as 2010, past Commissioner Luis A. Aguilar realized that the Rule does not always yield useful information. In a public speech, Mr. Aguilar revealed that some companies exceeded their peers in compliance with the Rule's spirit by sharing "actual facts that show the results of the company's efforts." However, Mr. Aguilar lamented that some companies have done the mere minimum in compliance with the Rule. According to Mr. Aguilar, many companies provided abstract information regarding their board diversity efforts and often limited "their disclosure to a brief statement indicating diversity was something considered."

Additionally, in January 2016, former SEC Chair Mary Jo White directed the agency's staff to review the Rule with an eye toward recommending improvements. In a July speech, she announced that the SEC staff is preparing a recommendation "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." Unfortunately, former Chair White resigned before this important work was completed.

During your nomination proceeding, you submitted written responses to three U.S. Senators who raised questions about your view on the Rule's effectiveness and on the SEC's past efforts to enhance the Rule. You also expressed a willingness to work with your fellow commissioners, staff (including the Office of Minority and Women Inclusion), and ACSEC to monitor this issue.

We request that you go beyond mere monitoring compliance and work with your fellow commissioners to propose a new corporate board diversity rule subject to public input. We also ask that you share with Congress the status of former Chair White's directive, as well as your plans to build on the work already done by the SEC's staff and ACSEC. We look forward to a response to our letter and a formal rulemaking effort to improve SEC's corporate board diversity disclosures.

Sincerely,

Gregory W. Meeks

Member of Congress

[1] See Item 407(c)(2)(vi) of Regulation S-K.

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