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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Diversity in the Boardroom is Important and, Unfortunately, Still Rare


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

SAIS Center for Transatlantic Relations
Closing the Gender Gap: Global Perspectives on Women in the Boardroom
Washington, D.C.
September 16, 2010

Thank you for that kind introduction. I'm delighted to be here to discuss a topic I care deeply about. I suspect that the invitation for me to speak today is directly related to the fact, that in my tenure as a SEC Commissioner, I have spoken out repeatedly on the subject of diversity in the corporate boardroom — and I appreciate the opportunity to do so again. 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.

This is a particularly timely forum. The persistent lack of diversity in our corporate boardrooms is an issue that requires continuing focus. A focus that needs to be maintained until our corporate boardrooms reflect the America we live in. Many nations have been focused on Board diversity for years.1 Others are just now beginning to do so.

Today's forum is also timely because 2010 has been a year in which we have seen countries around the world take steps to correct the persistent lack of diversity in corporate boardrooms. For example, in Australia, companies are now required to disclose the company's progress related to board-established gender objectives as well as disclose the number of female employees in the entire organization, in senior management, and on the board.2 In the United Kingdom, companies are now required to "pay due regard to the benefits of diversity on the board, including gender" when searching for and appointing directors.3

Closer to home, new SEC rules now require public companies to disclose how they view diversity. While there has been criticism as to how well the rule is working, and while there may be more work to do, it's an important first step for the United States.

In my remarks today, I will address the importance of diversity in three key institutions of American society: in corporate boardrooms, in government agencies and in the financial services industry.

Diversity in the Boardroom

Lack of Diversity in Corporate Boardroom

It continues to amaze me that there remains a need to highlight the importance of diversity in the boardroom. While it's important to think of diversity in broad terms — such as variety of thought, geography, age, career experience, etc. — I speak of diversity as it is understood in the more traditional categories of gender and ethnicity. Although I agree that "board diversity" can be viewed in different ways, we must recognize that corporate boardrooms across the country lack diversity in terms of the ethnicity and gender of their members.

There are many who believe that a diverse board improves outcomes, particularly financial performance and that it improves decision-making processes, which may in turn improve firm performance.4

Many studies indicate that such diversity in the boardroom results in real value for both companies and shareholders. 5 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.6 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.

Notwithstanding these studies, there is a persistent lack of diversity in corporate boardrooms across this country — 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.7 The one bright spot among these low numbers is that, in 2009, women represented 39% of all new board appointments.8 The 39% figure represents 165 out of 424 board positions filed in 2009 and represents an increase from the 25% of new board seats filled by women in 2008.9 I hope this upward movement is a trend rather than a year-to-year aberration.

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.10 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.

Because of the importance of boards of directors, investors increasingly care about how directors are appointed, and what their background is. This is especially true as American businesses compete in both a global environment, and in a domestic marketplace that is, itself, growing more diverse. In this ever more challenging business environment, the ability to draw on a wide range of viewpoints, backgrounds, skills, and experience is critical to a company's success.

New SEC Rule Regarding Diversity Policy Disclosure

Accordingly, in 2009, I worked with SEC staff to seek input through a Commission release as to whether investors and other market participants required greater information regarding diversity in the boardroom. In response to our proposal,11 we were deluged with letters. These letters were overwhelmingly supportive, with approximately 90% 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 and they made it clear 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 clearly material.

As a result it was incumbent on the SEC, under its mandate to promulgate regulations in the public interest, to respond to the needs of investors. 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 will require 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.

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. One example that satisfies the disclosure that investors demanded 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 diversity was something considered as part of an informal policy. 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 fund 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 fund's board diversity policy even if the information was provided in the aggregate and did not specifically identify any particular directors.

While the SEC's new rule focuses only on disclosure, an indirect effect of putting a focus on a board's diversity is that boards may decide to add, or add more, minorities and women as directors. It is reasonable to expect that the process of focusing on their diversity policy and its effectiveness could likely result in greater diversity. 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.

To that end, 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.

Importance of Diversity for Government Agencies and Market Participants

As we reach out to improve diversity on corporate boards, it is also important that government agencies and financial market participants better reflect our increasingly multicultural environment. I firmly believe that if government agencies and the private sector mirrored the diversity of the general population, issues such as diversity in the boardroom, and other important issues such as financial literacy in minority communities, would be a natural focus.

The federal government, for example, could do better. Although, according to the Annual Equal Employment Opportunity Commission Report on the Federal Workforce, people of color represented a third of the Federal work force in fiscal year 2009- approximately on par with current U.S. demographics- Latinos and women remain underrepresented.12

Where does the SEC fit into this picture? Unfortunately, the facts tell a dismal story. While 32 percent of the SEC work force comprised people of color in 2007, only 19% of our attorneys were people of color, and just 7 percent were at senior employee level. The most telling numbers are of our senior officers. As of fiscal year 2009, the SEC's senior officers were approximately 89% white, 4% African-American, 3% Hispanic and 2% Asian. The gender breakdown among these officers is 67% male and 33% female.

Unfortunately, the recently published Partnership for Public Service's Annual Survey of the Best Places to Work in the federal government provides more evidence that the SEC needs to improve. 13 The SEC hit the skids in the "Best Places to Work" rankings, a report compiled from information provided by federal employees. In the latest ranking, the SEC fell from 11th to 24th place. The Partnership looked at many factors including employee skills, effective leadership, training and development, and support for diversity. While the numbers were dismal across the board, I was struck by the fact that the SEC ranked 24th out of 28th agencies in support for diversity.

It is absolutely clear that the SEC needs to do a lot more to recruit, retain and advance minority candidates at the professional and senior levels. It is equally clear that an enormous opportunity to do this confronts the agency in the next year. As a result of new resources, the SEC is slated to hire 800 people — a tremendous influx of new talent for an agency of just 3,600 people.

It is important that minority candidates know about these opportunities at the SEC. Too often I hear a lack of diversity justified with the reasoning that the candidates do not exist. I know this is not true. Recently, I moderated an SEC-sponsored recruiting event targeting senior minority attorneys. The event, called the SEC Attorney Career Roundtable, was held at the SEC's headquarters in Washington, DC, and attracted over 280 interested attorneys. And in two weeks, the SEC will sponsor another such Roundtable recruiting minority candidates.

Given the SEC's tremendous hiring opportunity, the SEC senior staff making the hiring decisions must comprehend the persistent lack of diversity and undertake to interview the best and the brightest by conducting a comprehensive search. No search can be comprehensive if the talent pool is homogenous and limited.

Section 342 of the Dodd Frank Act — Office of Minority and Women Inclusion

Congress has made clear that efforts to recruiting and promote employees from all backgrounds are efforts that the SEC, and all other financial regulators, should be undertaking. In particular, Section 342 of the Dodd-Frank Act contains a clear Congressional mandate for the SEC to establish a new Office of Minority and Women Inclusion. This Office will be responsible for "all matters of the agency relating to diversity in management, employment, and business activities." The Director of this Office is tasked by statute with a broad mandate to develop standards for:

  • equal employment opportunity and racial, gender, and ethnic diversity of workforce and senior management;

  • increased participation of minority-owned and women-owned businesses in programs and contracts of the agency; and

  • assessing diversity policies and practices of regulated entities.

The new legislation specifically directs the agency to take affirmative steps to seek diversity in the workforce at all levels and includes steps that the SEC must undertake as a part of its outreach efforts. This new Office must be established within six months after the legislation went into effect — which means that this Office will have to be up and running in a matter of months. The SEC must by law undertake to increase diversity at every level of the agency's workforce and I look forward to this new Office leading the charge.

In addition to government agencies needing to do better, financial market participants in the private sector also need to do more to achieve diversity in the workplace. The lack of diversity in the financial services industry is particularly acute. A 2006 Equal Employment Opportunity Commission report on employment in the financial services industry found that the percentage of African American and Hispanic managers and professionals was lowest in the securities sector (4 % and 3%, respectively).14 Even more troubling, the GAO recently published a study finding that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008.15 According to EEOC data cited by the GAO, in 2008 white males held 64% of senior positions, African-Americans held 2.8%, Hispanics 3%, and Asians 3.5%. Clearly, the industry must do substantially better. Moreover, the financial services industry serves as an important pipeline into corporate boardrooms across this country. Improving the diversity statistics in the industry will significantly expand the pool of candidates for board seats.


I'll end my remarks this morning on a personal note. As someone who arrived in the United States at the age of six as a refugee from Cuba, I have benefitted greatly from the generosity of the American people and the opportunities that were made available to me. Throughout my life, it has been a priority for me to give back by working to ensure that opportunities in this country are available to all regardless of gender, race, ethnicity, or country of origin. Moreover, there is no doubt in my mind that women and minorities have a lot to contribute to our nation — and that includes contributing in the boardrooms to enhance how companies perform. There is no question that diversity in the corporate boardroom yields tremendous benefits in a myriad of ways.

It's clear, however, that there is much work in front of us. To that end, I want to commend SAIS for organizing this event and keeping this issue on the front burner. Thank you for having me here.




Modified: 09/16/2010