On February 6, 2019, as companies around the United States busy themselves for the annual ritual of parsing their D&O questionnaires, finalizing their proxy statements and submitting them to the board for approval, the Securities and Exchange Commission (“SEC”) released two identical new Compliance and Disclosure Interpretations (“C&DIs”) regarding disclosure, principally in proxy statements, relating to director backgrounds and diversity policies used by nominating committees in evaluating director candidates.
Item 401(e) of Regulation S-K requires companies to discuss the background of their directors, including their business experience, qualifications, attributes and skills that led to their nomination as a director. In addition, Item 407(c)(2)(vi) of Regulation S-K requires a company to discuss the nominating committee’s process for identifying and evaluating director nominees, including a discussion regarding any director diversity policy and the manner in which its effectiveness is assessed.
New Questions 116.11 and 133.13 relate to these requirements in Regulation S-K in instances in which a director has self-identified diversity characteristics, including race, gender, ethnicity, religion, nationality, disability, sexual orientation and cultural background. Specifically, to the extent the nominating committee has considered self-identified diversity characteristics referred to above and the director has consented to the disclosure of such characteristics, the SEC expects that the company will include a discussion of such characteristics and how the committee considered them in the director background section in its proxy statement.
In addition, with respect to the requirement that companies disclose their diversity policies with respect to the nominating committee’s evaluation of director nominees, the SEC also notes that it expects a discussion regarding how the nominating committee considers the director self-identified diversity characteristics and how the committee and policy take into account other diversity factors, such as work experiences, socio-economic background, military experience and demographic characteristics.
While the C&DIs themselves are a relatively incremental step that clarifies increasingly widespread expectations for disclosure of director skills and diversity attributes, there are a few considerations for companies in thinking about their proxy disclosure:
- How does existing disclosure align? While many companies are already attuned to diversity disclosure and have begun providing and improving diversity disclosure in recent years, these C&DIs provide an opportunity for companies to compare their proposed or existing disclosure. In particular, how the nominating committee views diversity characteristics and other types of diverse experiences or skills may be an area in which companies may consider additional disclosure.
- Consider a mechanism for consent. The Staff makes clear that individual consent is important prior to a company’s disclosure of a director’s diversity characteristics. Therefore, companies may wish to consider a formal process for soliciting express consent prior to disclosure. This could be accomplished as part of the D&O questionnaire process, separately on a board portal, or as part of the proxy approval process.
- Implicit expanded view of diversity. In the past couple of years, many investors have pressured companies on their boardroom diversity, but have focused on certain diversity characteristics. The C&DIs underscore the reality that companies value certain diversity characteristics as well as other diversity qualifications, such as work and military experience, socio-economic or demographic characteristics. This provides yet one more opportunity to also focus on the composition of the Board as a whole.
- Investor attention. It has become clear that board diversity is an issue that matters to many of the most influential investors. The C&DIs are yet another step in board oversight regarding diversity, in addition to recent state legislation, investor voting guidelines, proxy advisory firm considerations and others. Investors are likely to view the SEC’s expectations positively, and expect that companies solicit diversity information from directors, be thoughtful about their diversity policies and comply with the Staff’s disclosure expectations.
While the C&DIs may not have much significant impact on disclosure, and will not require companies to adopt new practices (yet), it is clear that, like investors, proxy advisory firms and other stakeholders, the SEC is paying attention to diversity issues and considering how these issues fit into the existing disclosure framework. As we mentioned in our annual board memo, it is becoming clear that companies should be thoughtful and develop a proactive strategy to ensure that they are responsive to the concerns from their stakeholders.