SEC Regulation S-K and Board Diversity

Abstract

In an attempt to address a lack of diversity on corporate boards, the Securities and Exchange Commission (SEC) passed a rule in 2010, requiring firms to disclose whether they consider diversity in the director nomination process, and if so, how the policy’s effectiveness is assessed. The rule does not define the term diversity, leaving it up to each firm to offer its own interpretation. We examine the rule’s effectiveness and find that some firms fail to comply with the rule and do not discuss whether diversity is a factor that is considered in director hiring. Among compliant firms, the most common definitions of diversity are experiential (skills, experience, knowledge) rather than socio-demographic (gender, race, age, geographic background, and representation). We also compare board diversity between compliant and non-compliant firms and do not find differences in the hiring of diverse candidates (women and minorities) as directors following the rule’s introduction, suggesting limited success. Our findings, which are especially salient as the SEC currently considers revising the rule, highlight the importance of adopting a formal definition of the term “diversity” and instituting stricter diversity disclosure guidelines.

Keywords: corporate governance, diversity, proxy statement, disclosure

JEL Classification: M48