It’s Time for the SEC to Act on Disclosures for Corporate Boards and Workforce Diversity
By Benjamin Schiffrin, Director of Securities Policy, Better Markets
In the aftermath of George Floyd’s murder in 2020, many public companies expressed a commitment to increase the diversity of their boards and workforces. But, as discussed below, companies have struggled to actually increase diversity. And many of these companies still do not disclose the diversity of their boards or workforces to the public. So the public is kept in the dark about the extent to which companies who say they want to promote diversity actually do so. SEC rules requiring diversity disclosures would allow the public to hold companies accountable.
On June 11, 2021—more than three years ago—the SEC announced that it would include on its rulemaking agenda rules requiring disclosures regarding corporate board diversity and workforce diversity. Such rules would go a long way towards creating a more inclusive financial system, because the only way to hold public companies accountable for their pledges to increase diversity is to require them to disclose information about their actual diversity practices. Yet three years after the SEC announced its rulemaking agenda, rules regarding board diversity and workforce diversity disclosures remain on the agenda, having not yet been proposed, let alone adopted.
The SEC must act so that investors receive information about the diversity of the boards and workforces of public companies. The idea is not, as some suggest, to shame companies into increasing their diversity. Rather, the idea is that transparency into a company’s diversity practices will force companies who voice a commitment to diversity to follow through and prevent them from making public statements about diversity that are easily revealed as nothing but empty rhetoric.
The magnitude of the problem is hard to overstate. In 2023, women still accounted for only 32% of directors in S&P companies, and racial or ethnic minorities accounted for only 25% of such directors. Black directors specifically hold only 12% of board seats at S&P 500 companies. Similarly, in the Russell 3000, women accounted for only 28% of directors, and racial or ethnic minorities accounted for only 21% of such directors. The percentage of racially or ethnically diverse directors in Russell 3000 companies has remained virtually unchanged since 2018.
The numbers are no better when it comes to the workforce. A recent study of 3,000 public companies found that racial minorities account for 36% of firms’ overall workforces but only 28% of middle managers. Black employees specifically are 8% of the workforce but only 4% of middle managers.
Investors need disclosures on a company-by-company basis so they can determine for themselves whether the companies in which they invest are actually making progress regarding diversity. A fundamental precept of the federal securities laws is that public companies cannot lie to their investors about material information. There should be no question that information about the diversity of a company’s board and workforce is material. So public companies should not be able to promote their diversity without those statements being true. Yet in the absence of SEC rules that require companies to disclose the diversity of their boards and workforces, investors and the public are unable to determine whether public company statements about diversity match reality.
Although some companies voluntarily disclose information about their diversity, reliance on voluntary disclosures is not sufficient. Research shows that companies with higher levels of racial and ethnic diversity among managers are more likely to make voluntary diversity disclosures. So a system that relies on voluntary disclosures is unlikely to lead to significant change because less diverse companies will simply not disclose diversity information, preventing the public from knowing whether they are fulfilling any commitments to diversity. It is not surprising that some companies—especially those who lag behind—do not want to disclose information about their diversity practices. But this is precisely why diversity disclosures must be mandatory—to achieve racial equity, corporations must be subject to regulatory obligations. As a result, policy measures like disclosure mandates are needed to make diversity information accessible and to drive change.
Institutional investors such as BlackRock and State Street have raised concerns about inadequate disclosures when it comes to board diversity and have taken steps to pressure companies to increase their diversity disclosures. But institutional investors should not have to pressure companies to disclose information about board diversity. Public companies should be required to provide information about board and workforce diversity so that it is available to all investors.
Indeed, one of the reasons diversity disclosures are so important is that they enable investors to better determine how to they want to invest their capital. Investors can drive change by valuing diversity and deciding to invest in companies that meet diversity benchmarks. This gives investors a tremendous amount of power. But they cannot exercise this power if they do not know whether companies are meeting the benchmarks that they value. So investors need greater public diversity disclosures so they can evaluate companies on the metrics that matter to them. The SEC should take the lead and require companies to disclose this information for the benefit of all investors.