Disclosing Corporate Diversity

Atinuke O. Adediran is Associate Professor of Law at Fordham University School of Law. This post is based on her recent paper, forthcoming in the Virginia Law Review. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here); and Duty and Diversity by Chris Brummer and Leo E. Strine, Jr. (discussed on the Forum here).

Since 2020, diversity has become a central concern for corporations and their leaders, prompting many corporations to voluntarily integrate gender and racial diversity in particular, into their Corporate Social Responsibility (“CSR”), or Environmental, Social and Governance (“ESG”) disclosures. In my paper, Disclosing Corporate Diversity, I use machine-learning techniques to analyze 3,461 CSR/ESG reports for 1,288 public companies listed on Nasdaq Stock Market LLC (Nasdaq) and the New York Stock Exchange (NYSE) for the five-year period between 2017 and 2021. I provide empirical evidence that in the last five years, public companies have firmly integrated diversity disclosures into their CSR/ESG disclosures.

I argue that these disclosures are important not only for shareholder transparency, but that they can be used instrumentally to increase corporate diversity for other stakeholders, including employees, suppliers, customers, community members, advocacy groups of various types, activists, reformers, and the public. I note that scholars and others have underappreciated this possibility for two reasons. The first is that scholars routinely write about disclosures in the context of CSR/ESG, but not often in the context of corporate diversity, even though diversity is part of CSR/ESG. The second is about the limits of the securities laws. Like other forms of disclosures under the securities laws, diversity disclosure rules often focus on shareholder transparency rather than to address concerns about the lack of diversity in corporations for all stakeholders.

I analyze the limitations of recent emerging attempts by the Securities and Exchange Commission and the United States House of Representatives to mandate diversity disclosures. In August 2021, the SEC approved Nasdaq’s rule requiring companies listed on its exchange to disclose the diversity of their boards pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4, making it the first ever CSR/ESG disclosure mandate. While the rule is an important step toward mandating diversity disclosures, the SEC is limited in its authority to use disclosures for social change. This limitation is evidenced by three features of the Nasdaq/SEC rule. First, the rule requires Nasdaq-listed companies to have two diverse board members—at least one director who self‑identifies as female and at least one director who self-identifies as an underrepresented minority or explain why they lack diversity on their boards. The “explain” portion of this “disclose or explain” approach means that companies do not have to disclose two diverse board members if they can explain why they lack board diversity. The SEC states that “while the [rule] may have the effect of encouraging some Nasdaq-listed companies to increase diversity on their boards, [it] does not mandate any particular board composition.” Therefore, the rule advances shareholder transparency but stops short of using disclosures to increase board diversity. Second, the rule applies only to boards and would not require the disclosure of employee or executive diversity, which significantly limits its reach. Third, it applies to only public companies listed on the Nasdaq stock exchange; it does not apply to companies listed on other exchanges or private companies with large valuations that are much like public companies, thereby omitting a large subset of the economy.

The United States House of Representatives also recently passed the ESG Disclosure Simplification of 2021 (“ESG Disclosure Act”). The Act establishes a disclosure mandate for a range of CSR/ESG matters, including sustainability, climate risk, political contributions, executive compensation, and diversity for all employees. In this way, it is broader than the Nasdaq/SEC rule. The diversity portion of the rule has three main components. The first requires companies to disclose diversity statistics—gender, race, LGBTQ+ and veteran status for senior executives and other individuals in the workforce. The second requires diversity statistics of board directors, their nominees, and executive officers. There is also a component that mirrors provisions of Item S-K that requires the disclosure of whether the board has adopted any plan, policy, or strategy to promote diversity on the board and among executive officers. This is Congress’s first attempt to create a broad CSR/ESG disclosure rule, which is a step in the right direction. However, the proposed Act is another step towards mandating diversity disclosures for shareholder transparency because it is only a statistical disclosure rule. There is no forward-looking provision that would require companies to track their performance over time. Contrast this to the climate-risk portion of the bill, which has forward-looking components and would require companies to disclose specific action taken to mitigate climate risks.

I therefore propose new legislation to overcome the shortcomings of the Nasdaq/SEC rule and the ESG Disclosure Act if the goal is to increase corporate diversity. The first component of my legislative proposal is a statistical disclosure rule much like the Nasdaq/SEC rule and the ESG Disclosure Act. Since it’s important to know where the data sits annually to measure what progress has been made, companies would disclose the race, gender, LGBTQ+ and disability status of their employees and executives. The second component is a forward-looking provision with three components. First, companies would disclose how they assess diversity annually and their hiring information. Second, companies will provide a description of specific action they have taken to increase employee diversity until they reach a 50 percent goal or aspiration. Third, companies will provide a description of specific action they have taken to increase board diversity until they reach a 50 percent goal or aspiration. I use a 50 percent goal or aspiration because research has indicated that 50 percent is the generally accepted peak that most people—men, women, and people of color—believe is optimal for diversity in institutions. There is variation among different groups within that 50 percent, which my proposal tries to account for with a 30 percent goal for women and LGBTQ+ individuals, and 20 percent goal for people of color. Finally, I highlight the role of shareholder activists and employee activists as mechanisms for social change. These agents can push companies to report more details of their strategies, exert some pressure on directors to address concerns, and generate significant media attention that can be helpful towards increasing corporate diversity.

The complete paper is available for download here.

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