Democratic Senator Bob Menendez of New Jersey, with the support of nine other Senate Democrats, on Tuesday introduced legislation that would require public companies to disclose information regarding the racial, gender, ethnic and veteran composition of their boards and senior management.
According to a statement from Menendez’s office, the Improving Corporate Governance Through Diversity Act is designed to address what it calls shortcomings in SEC diversity-disclosure requirements. In addition to requiring companies to report demographic information, the legislation would require the director of the SEC’s office of minority and women inclusion to publish a best practices and compliance report to the commission every three years.
The bill would also create a diversity advisory group that would study corporate diversity and submit annual reports to Congress.
Menendez is a member of the Senate Banking Committee. His co-sponsors are Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, Chris Van Hollen of Maryland, Cory Booker of New Jersey, Dianne Feinstein and Alex Padilla of California, Kirsten Gillibrand of New York, Catherine Cortez Masto of Nevada and Raphael Warnock of Georgia. Representative Gregory Meeks, D-New York, is introducing companion legislation in the House of Representatives.
‘For too long corporate America has fallen short in racial, ethnic and gender diversity. Without greater diversity in top corporate positions, the US will fail to compete with other leading economies and stall our nation’s progress toward full inclusivity,’ Menendez says in a statement. ‘This bill will ensure transparency in corporate America, while highlighting the need for further accountability for public companies. It’s time corporate boardrooms mirror the rich diversity of our country.’
‘Last Congress, the House passed the Improving Corporate Governance Through Diversity Act. Now, I urge my colleagues in the Senate to review and pass the companion bill Senator Menendez is reintroducing today,’ Meeks says in an announcement.
‘Diversity is proven to have a positive impact on business performance and we want to ensure an equitable and fair future for everyone. Disclosing the gender, racial, ethnic and veteran makeup of these corporate boardrooms will not only shed light on the value of diversity, but also hopefully encourage corporate shareholders to increase diversity in the highest ranks of their corporations.’
PRESSURE FOR CHANGE
The legislation comes at a time when companies are facing greater investor pressure to at a minimum release information about diversity on their boards and among their workforces. For example, State Street Global Advisors (SSGA) last month announced proxy voting practices intended to ensure companies are transparent about the racial and ethnic composition of their boards and workforces.
According to these practices, SSGA will this year vote against the chair of the nominating and governance committee at companies in the S&P 500 and FTSE 100 that do not disclose the racial and ethnic composition of their board.
New York City comptroller Scott Stringer last July wrote to the CEOs of 67 S&P 100 companies urging them to disclose data from their EEO-1 reports to enable investors to measure the success of their diversity and inclusion practices across their workforces. He later announced that 34 of those companies had agreed to do so, increasing the number of S&P 100 companies releasing their EEO-1 data from 14 to 48.
A recent study from EY finds that, asked to name the three biggest drivers of strategic success over the next three to five years, almost half (42 percent) of investors polled mention diversity of the board, management and workforce.
Companies are also facing legal and regulatory pressure around diversity. A new California law will require all public companies with headquarters in the state to have a minimum ratio of board members from under-represented communities starting December 31, 2021 and then new ratios from December 31, 2022.
It defines a director from an under-represented community as ‘an individual who self-identifies as black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian or Alaska Native, or who self-identifies as gay, lesbian, bisexual or transgender.’
In addition, Nasdaq has filed a proposal with the SEC to adopt new listing rules that would require companies to have – or explain why they do not have – at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an under-represented minority or LGBTQ+. Listed companies would also have to disclose consistent, transparent diversity statistics regarding their board.
The Nasdaq proposal has attracted dozens of comment letters, many offering positive feedback, including from commenters from both the investor and corporate communities. Republican members of the Senate Banking Committee have, however, urged the SEC to shut down the initiative.