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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Board Diversity: Why It Matters and How to Improve It


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Agenda Luncheon Program
New York, NY
November 4, 2010

Thank you for that kind introduction. I'm delighted to be here to discuss board diversity, a topic I care deeply about. I’d first like to thank Gavin Daly and Agenda for the opportunity to speak with you today. Before I continue, however, I need to issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or members of the staff.

In preparation for today’s speech, Gavin Daly, the Executive Editor and Managing Director at Money-Media, asked me to delve into three key topics:

  • The background and significance of the rule passed last year by the SEC which requires public companies to disclose how they view diversity with respect to their boards;
  • The initial disclosures from companies resulting from the rule which went into effect earlier this year; and
  • How to address the continuing issue of the lack of diversity on corporate boards.

After I have addressed these topics, I look forward to your questions and to having a dialogue with you on these important issues.

At the start, let me tell you a little bit about myself so you can understand what underlies my passion for this subject. I was born in Cuba and at the age of six, my parents sent my brother and me to the United States because they feared for our safety. Fidel Castro had seized control of the Cuban government almost two years earlier and rumors were rampant that the children would be sent to indoctrination camps. Cuban parents, afraid and unsure, were desperately sending their children far away. Thousands of children arrived in the United States alone, as refugees, without their parents or any resources. In my case, I did not see my parents again for four years. At the time, I did not speak a word of English and arrived with little more than the clothes that I was wearing.

Like so many others, I came to this country with very little and I'm grateful to this country for the opportunities it has provided. I paid my way through college, law and graduate schools by taking on jobs ranging from being a "stock boy" in a yarn store to loading baggage and cargo into airplanes at the Miami airport.

Once I was reunited with my parents, we moved through a few different towns as my father looked for better job opportunities. We moved to Ravenna, Ohio; Little Rock, Arkansas; and Rome, Georgia. I happened to live in Little Rock in the aftermath of the Little Rock Nine, the courageous African-American students who desegregated Central High School in 1957. I was awestruck that a legal process, a court order, could be a catalyst for social change. That's when I began to notice the societal ramifications of being part of a minority group. It’s also where I began to understand the power of the law and when the idea of becoming a lawyer started to grow.

I have now been a lawyer for over 30 years. I started my career at the SEC as a Staff Attorney and then went into private practice where I focused on securities and corporate law and became a partner at various national law firms. And for almost a decade, I served as the general counsel and head of compliance of a large global asset manager. During my time there, I also served as the president of a broker-dealer and headed the company's Latin American operations.

In addition to my professional work, I have actively participated in many community organizations. In particular, before accepting this appointment to the SEC, I served on the boards of several organizations that foster diversity, such as the Mexican American Legal Defense and Education Fund (MALDEF), the Hispanic National Bar Association, the Hispanic National Bar Foundation, the Georgia Hispanic Bar Association, the Girl Scouts local council and the Latin American Association. I've brought this commitment to diversity to the SEC and I am very supportive of efforts to create a more diverse workforce. I'm proud to serve as the sponsor of various affinity groups at the SEC, such as the Hispanic Employment Committee, the African American Council and the Caribbean American Heritage Committee.

New SEC Rule Regarding Diversity Policy Disclosure

Let me now discuss the background of the new SEC rule that requires public companies to disclose how they view diversity with respect to their boards. However, before discussing the results of this undertaking, it is important to examine why it was necessary in the first place.

As John Adams once said, “facts are stubborn things” and the facts concerning the diversity of corporate boards in the United States tell a dismal story. Simply put, women and minorities remain woefully underrepresented. For example, in 2008, the Alliance for Board Diversity compiled statistics about the composition of the boards of directors of Fortune 100 companies and found the majority of board members, 71.5%, were white men, and only 28.5% of the board seats were held by women and minorities.1

Furthermore, this lack of diversity persists even though there are many studies indicate that diversity in the boardroom results in real value for both companies and shareholders.2 In fact, a report commissioned by the California Public Employees' Retirement System (CalPERS) found that companies that have diverse boards perform better than boards without diversity.3 The report — Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value — stated that companies without ethnic minorities and women on their boards eventually may be at a competitive disadvantage and have an under-performing share value. The report also found that a selected group of companies with a high ratio of diverse board seats exceeded the average returns of the Dow Jones and NASDAQ indices over a five-year period.

I applaud those companies that have developed diverse boards and I acknowledge the efforts by investors to work in their self-interest by working to diversify the boards of the companies they own. For example, last year the California State Teachers' Retirement System (CalSTRS) submitted nine proposals on board diversity.4 All but one was withdrawn after the companies amended their governing documents to ensure that diversity was one characteristic they considered when developing a pool of board candidates. In two cases, the companies added a woman to their board so the proposals were withdrawn. In the one case where the proposal did not pass, the company amended its Nominating and Corporate Governance Committee charter to address the concerns raised.

Given the apparent lack of diversity and the many studies that indicate the real economic benefits of diverse boards, it should be no surprise that many investors — from individual investors to sophisticated institutions — asked the Commission to provide for disclosures about the diversity of corporate boards and a company's policies related to board diversity. For example, in 2003, the Commission did a rulemaking regarding nominating committees that did not mention diversity, and nonetheless the Commission received a significant number of letters requesting that the Commission require this disclosure.

The calls from investors requesting information about board diversity resonated with me and I worked with the SEC staff to seek more formal input as to whether investors and other market participants required greater information regarding diversity in the boardroom. In response to this request the Commission received a deluge of comment letters.5 These letters were overwhelmingly supportive, with approximately 90% of those addressing the topic expressing support for disclosure of information related to race and gender diversity on the board.

We received letters from persons and organizations’ representing over $3 trillion in assets advising us that information about board diversity is something they find important in the assessment of companies that they own. When such a sizeable portion of the U.S. capital markets tells the Commission that they seek diversity-related information for their decisions, it is incumbent on the SEC to respond.

Accordingly, last December, the Commission, for the first time, adopted a rule to assess a company's commitment to developing and maintaining a diverse board. Specifically, the rule now requires a company to disclose:

  • whether diversity is a factor in considering candidates for nomination to the board of directors;
  • how diversity is considered in that process; and
  • how the company assesses the effectiveness of its policy for considering diversity.

The Initial Response by Companies to the Diversity Policy Disclosure Rule

This new rule began applying to proxy solicitations on February 28, 2010. A review of the filings received indicates that some companies have done a very good job. For many companies, however, there is a great deal of room for improvement. For example, one disclosure that satisfies investors’ demands was by a company that disclosed that of the 14 directors on the board, three were women, two were African-American, and two were Hispanic. This disclosure is noteworthy because instead of just talking about the diversity policy and how it is implemented, the company gives investors actual facts that show the results of the company's efforts.

Unfortunately, while some companies provided useful information in the spirit of the SEC rule, many other companies provided only abstract disclosure — often times limiting their disclosure to a brief statement indicating that diversity was something considered as part of an informal policy. The new rule requires more than this. If a company has a policy, informal or formal, the rule requires a discussion of how diversity is considered in that process and a discussion of its effectiveness. Moreover, many companies did not include any discussion of any concrete steps taken to give real meaning to its efforts to create a diverse board. By leaving out the steps taken and how those efforts are evaluated, these companies fail to provide investors with useful information, and it deprives investors of information they have demanded. I have asked our staff to follow up with some of these companies and I expect this disclosure to improve.

As companies comply with our new disclosure rule, I ask them to keep in mind that investors requested this disclosure. Accordingly, companies should prepare the disclosure with an eye toward it being useful to investors. In describing how diversity is considered in identifying director nominees, companies should focus on the concrete steps taken to develop a slate of diverse candidates for a position. For example, the disclosure might indicate whether the company has a policy of:

  • interviewing one or more candidates who are a minority and/or a woman;
  • retaining a search firm that has been specifically instructed to seek candidates that are minorities and/or women; and/or
  • soliciting recommendations from organizations that have a reputation for identifying candidates with diverse backgrounds.

When discussing the effectiveness of the policy and how that effectiveness is assessed, the disclosure could, for example, indicate how many candidates were interviewed that were women and/or minorities. Useful disclosure also could highlight the diversity of the existing board of directors, which would shed light on the effectiveness of the company’s board diversity policy even if the information was provided in the aggregate and did not specifically identify any particular directors.

Diversity in Corporate America: The Way Forward

Gavin also asked me to offer some thoughts on what is needed to address the continuing lack of diversity on corporate boards.

While the SEC and others have begun to act on this issue, we all know that an effort on a broader scale to increase diversity in corporate America has been an issue that has elicited much discussion and far too little action. Given the preponderance of data exhibiting the material benefits of increased diversity on boards, it’s obvious to ask: what’s holding this effort back? What’s missing is the will – the will to act.

One notable example that demonstrates the will to act and that has shown positive results is the decision made by the National Football League to stop talking and start acting.

The head coaching position for NFL franchises stood out for decades for its glaring lack of diversity. For example, in 2002, the NFL published a study that said 70% of NFL players were black and yet, only 28% of the assistant coaches and 6% of head coaches in the league were black.6

Over the years, this persistent lack of diversity at the head coaching spot attracted a long list of justifications including:

  • that there were no good minority candidates to be found;
  • that because the top college football coaches were not diverse, no pipeline existed; and
  • that the head coaching position required a kind of thinking that did not lend itself to minority coaches.

How often have we heard these spurious arguments? It is often said that one would love to hire minority candidates except they do not exist. As I have said before, this argument is completely bogus and the NFL proved it to be so.

In 2003, the NFL instituted the Rooney Rule, which requires all NFL teams to interview at least one minority candidate when filling a head coaching position or risk being fined. The goal of the rule was to put qualified candidates that may not have been thought about in the first instance in front of the team owners conducting the hiring. Since the rule was adopted, 22% of the head coaching spots have been filled with minorities- and, most notably, during the 2006 league season, 7 of the league’s 32 head coaches were African-American (this was a high water mark — currently there are 6 head coaches, or 18.75%).7 This effort to expand the candidates considered for the head coaching job was the right thing to do, and it also helped teams find the very best people for the job. The results speak for themselves — two of the last five Super Bowls have been won by teams with African-American head coaches.

The NFL moved from lip service to action and the results are self-explanatory. Let’s face it — many corporate boards may need their own Rooney rule because I know that qualified candidates exist.

I encourage companies to prioritize and implement practices to increase board diversity. To do this, it is imperative to have processes in place to be able to identify diverse candidates. For example, a nominating committee should follow policies and procedures that require the proactive development of a diverse slate of candidates in advance of a board opening becoming available. In today's environment, diversity in the boardroom is a business necessity that companies need to take seriously.

I personally believe that companies that expand their search for new directors to include more women and minorities will find a breadth and depth of talent that will serve to improve their performance and increase the wealth of their investors.


With that, I want to thank you for the opportunity to be with you today. I look forward to hearing your thoughts on these issues.

1 Alliance for Board Diversity Report on Women and Minorities on Fortune 100 Boards. (2008), available at http://www.elcinfo.com/downloads/docs/Final_1_22_08.pdf

2 Deborah L. Rhode and Amanda K. Packel. “Diversity on Corporate Boards.” Stanford Center on the Legal Profession. Submitted for "Diversity on Corporate Boards: When Difference Makes a Difference" Conference. (September 10, 2009).

3 Id.

4 CalSTRS Reports Corporate Governance Success in 2010 Proxy Season. (August 26, 2010), available at http://www.calstrs.com/Newsroom/2010/news082610.aspx

5 Proxy Disclosure and Solicitation Enhancements, Securities Act Release No. 33-9052, Exchange Act Release No. 34-60280, 74 Fed Reg. 35076 (proposed July 17, 2009), available at http://www.sec.gov/rules/proposed/2009/33-9052.pdf

6 Greg Garber. "Thanks to Rooney Rule, doors opened." ESPN.com. (February 9, 2007), available at http://sports.espn.go.com/nfl/playoffs06/

7 Antonio Gonzalez. "NFL gets ‘A' for racial hiring; slow hiring women." Associated Press. (September 29, 2010), available at http://www.thegrio.com/sports/nfl-gets-a-for-racial-hiring-slow-hiring-women.php



Modified: 11/04/2010