SEC Commissioner Hester Peirce, listens during a House Financial Services Committee hearing in Washington, D.C.
About the author: Howard Fischer is a partner with Moses & Singer’s securities litigation and white collar practices. He was senior trial counsel at the Securities and Exchange Commission from 2010 to 2019.
The Securities and Exchange Commission, in a starkly divided, partisan split, recently approved rule changes proposed by
The exchange will now be permitted to require companies listed thereon to disclose information related to the gender, racial, and LGBTQ+ characteristics of their board of directors. The commissioners’ divergence reflects less than a simple disagreement regarding the technical listing requirements of securities exchanges. Instead, it is indicative of a much more fundamental disagreement about the role of the corporation in society, and whether it is appropriate for regulatory institutions to help define that role.
On Aug. 6, the SEC voted 3-2 to approve Nasdaq’s proposal. The rule would require listed companies to have, or explain why they do not have, at least two diverse board members, including one self-identified as female and one an underrepresented minority or LGBTQ+. (Nasdaq also proposed to offer access to a recruiting service.) Every commissioner, including those opposing the rule, claimed to support diverse boards.
In the official enacting statement, the SEC emphasized that the rules did not impose mandates, but simply instituted a transparency-based regime where companies had to disclose the make-up of their boards, or explain why they had not achieved diversity. Even so, and even though many listed companies are voluntarily (and enthusiastically) increasing diversity not just on boards but at all levels of management, the proposal inspired a remarkably scathing dissent. An analysis of the reasons given by the dissents provides helpful insights on the more foundational fault lines that are bound to recur with almost every piece of new SEC regulation over the next few years.
A key finding justifying the rule was the significant investor demand for this kind of disclosure (although the SEC recognized the point that if that were the case, it would likely happen due to market pressure, without the need for regulatory intervention). The SEC found that a broad array of investors valued information regarding board diversity in reaching investment decisions, but feared that absent requiring disclosure there might be unequal access to that information. While the enacting statement contained a lengthy discourse regarding the correlation between board diversity and performance, it concluded both that this proof was equivocal, and ultimately irrelevant, prioritizing meeting investor desire for this information through disclosure requirements so that investors could reach their own conclusions. And, for those companies that determined they would rather not disclose their board composition, they were always free to list on other exchanges.
Commissioners Elad Roisman and Hester Peirce voted against the diversity disclosure proposal (while voicing support for increased board diversity). Whereas Roisman’s opposition relied on what might be seen as technical issues, Peirce passionately, and at length, opposed the proposal in a strongly worded public statement.
The tenor of Peirce’s attack is unusual, as are the strawmen she erects. Among these bogeymen is the risk that companies will ignore more-qualified candidates in favor of those from diverse backgrounds, or that companies will create fraudulent profiles in order to claim diversity because the proposal would “incentivize misleading disclosure.” She worried that director candidates might be forced to disclose private information about their background against their will, including that a company could “require its director candidates to undergo genetic testing to check” to determine whether they qualify as minorities.
But the main thrust of her attack relies on asking “whether the information is relevant to investors in a way that matters under the Exchange Act” (emphasis added). When Peirce argues that diversity is not proven to correlate to performance, she essentially ignores the enacting statement that “studies of the effects of board diversity are generally inconclusive” — and the focus on providing investors desired information. She in essence is promoting a limited view of how corporations should be judged by investors, a view that is becoming increasing unfashionable.
Many SEC rule-making proceedings can be contentious and rife with disagreements as to the importance of the goals at issue, or about underlying facts, or as to how certain outcomes are to be prioritized. The vociferous disputes over a proposal that simply seeks disclosure about what many companies are already trying to accomplish is something more. This dispute is not one about what investors find material or not, but rather, as to what they should find material. It is an argument about the role of the corporation in society, and the role of regulatory bodies in delineating that role. While the current majority envisions regulation as a legitimate tool for shaping corporate citizenship, in the guise of promoting disclosure, Peirce, and to a lesser degree Roisman, see maximizing returns as the sole legitimate corporate purpose. This radically divergent view is bound to shape almost every aspect of the SEC’s regulatory agenda over the next few years.
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