In its latest rulemaking, the Securities and Exchange Commission has included a provision amending its rules to require the Nominating Committee of a company Board of Directors to disclose whether and how diversity is used as a factor in nominating director candidates to the Board of Directors. The new rule also includes a provision seeking comment on whether it should amend its proxy disclosure rules to require companies to disclose additional information about the Board’s consideration of diversity in nominations. The new rules do not themselves define diversity, but leave that up to Boards in their disclosures.
I wonder how this new disclosure requirement fits within the SEC’s mission, found in the Securities Act of 1933, to protect investors and encourage capital formation. I realize that there is a vigorous debate about affirmative action in other policy areas, but I simply do not see how that objective fits within the SEC’s mandate to protect the capital formation process. If there was some link between Board diversity and firm performance, we would see some differential in trading values. We do not.
I fundamentally do not accept that the SEC has a role to play in engineering social policy. Its statutory mandate does not permit it, and the SEC is not equipped to do it well. I think everyone can agree that securities lawyers and financial accountants do not have the right skill set for that purpose. Even if the justification for this new rule is one based in social policy, the arguments we see about affirmative action in other policy areas also do not carry over well into Board selection. The pool of qualified Board candidates must have sufficient commercial experience such that their net worths are likely to rank within the upper echelons of the social ladder. I also fail to see how cultural, religious, or gender based perspectives differ on, for instance, how to structure a debt offering or divest an operating subsidiary.
At least the new regulations don’t mandate selecting folks based on pre-established criteria like the post-Sarbox listings standards did. And let’s hope they don’t ever go as far as suggestions from Profesor Emma Jordan, who in a recent Center for American Progress paper advised that firms accepting TARP money be required to nominate ex-bureaucrats and social organizers to seats on corporate Boards to improve diversity of experience in the boardroom. I recall that White House Chief of Staff Rahm Emmanuel was a member of the Board of Directors at Freddie Mac when many of the loans that took Freddie down were originated, but I suppose we should give Professor Jordan a mulligan on that one.
At the end of the day, it would seem that boilerplate disclosure, such as “The nominating committee of the Board takes into account the diversity of experience of Board candidates, and determines how that experience will improve the function of the Board,” would be sufficient to sidestep the burdens of this new regulatory overreaching. Hopefully this is not the opening sally for direct Board diversity mandates from the SEC.
