Keynote Speech by SEC Commissioner:
An Update on Diversity and Financial Literacy
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
2011 Hispanic Association of Corporate Responsibility—Corporate Directors Summit
April 30, 2011
Thank you for that kind introduction. It is my pleasure to be speaking at 2011 HACR Corporate Directors Summit. Before I start, however, I am going 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.
Today, I want to spend my time with you focused on the need for corporate America and its regulators to embrace this nation’s growing diversity. It is past time to see the diversity of our nation reflected in corporate boardrooms, in the financial industry, and in the government. I also want to briefly discuss the need to improve financial literacy in minority communities.
Lack of Diversity in Corporate Boardroom
Let me start by talking about the persistent lack of diversity in our corporate boardrooms. As this group knows, many studies indicate that diversity in the boardroom results in real value both for companies and for their shareholders.1
Notwithstanding these studies, there is a persistent lack of diversity in corporate boardrooms across this country — and women and minorities remain woefully underrepresented. In 2008, for example, the Alliance for Board Diversity compiled statistics about the composition of the boards of directors of Fortune 100 companies and found 71.5% of all corporate board seats were held by white men, and that only 28.5% of the board seats were held by women and minorities.2
Given the 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 — have requested that companies provide information about the diversity of their corporate boards and about their policies related to board diversity. For the most part, these requests have fallen on deaf ears.
However, in late 2009, the Commission adopted a rule to assess a company's commitment to developing and maintaining a diverse board. In summary, public companies are now required to disclose whether diversity is a factor in considering candidates for nomination to the board of directors, and how the company assesses how effective the policy has been.
So, how is corporate America doing? Just recently the SEC staff reviewed the disclosures made by several hundred companies resulting from the new diversity disclosure requirement. From this review, the staff issued a number of comment letters. The results of this review seem to indicate that there are two primary areas of compliance weakness.
First, some companies are failing to disclose important information regarding their board of director diversity policies. These companies are drawing a false distinction that disclosure is only required if the company has a “formal” policy, rather than an “informal policy.” These companies and their advisors need to go back and review the rule. The rule states companies must disclose “whether, and if so how, a nominating committee considers diversity in identifying nominees for director.” But it does not end there. It also states that if a company has a “policy with regard to the consideration of diversity in identifying director nominees,” the company must disclose “how this policy is implemented and how the nominating committee or the board assesses the effectiveness of its policy.” This disclosure does not depend on whether the policy is defined as “formal” or “informal.” Moreover, these companies seem to have forgotten why investors asked for this disclosure, and why the SEC promulgated this rule — it is because investors care about board diversity issues and it is an important factor when they make investment and voting decisions. Investors do not care if the diversity policy is formal or informal; they care about the substance of the policy and whether it is effective.
Second, for those companies who do disclose they have a policy, we are seeing incomplete disclosure regarding the evaluation of the effectiveness of the policy. Thus, companies are complying with the first prong of the rule but not the second—which requires the company to disclose how it evaluates the diversity policy’s effectiveness. It is important that all companies — not just those with good stories to tell — comply with both prongs of the rule. The rule requires companies to be transparent about how they treat diversity and full compliance with the rule is the only way to achieve this goal.
I know these companies can do a better job. I have asked the SEC staff to continue to monitor this situation to make sure companies are transparent about their diversity policies.
Finding Qualified Board Candidates
We all know of superb women and minorities who would be excellent directors. Moreover, there are more resources than ever before that can assist companies in finding qualified board candidates. In fact, an increasing number of groups are developing lists of highly qualified women and minorities. For example, your own organization has a database of over 500 candidates. It is my understanding that, in the fourth quarter of this year, HACR will issue a book listing these qualified, board-ready candidates.
Another source of candidates is the Agenda Diversity 100. In November 2010, Agenda, a Financial Times publication focused on board-related issues, published a directory that lists 100 women and minority board candidates. Agenda gathered a panel of corporate-governance experts, executive recruiters, and representatives from diversity advocacy groups to nominate possible candidates for inclusion in the guide. This group started with 271 candidates and ended up with 100 after subjecting them to a set of rigorous standards.3
More recently, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) announced that they are working with an advisory panel of corporate governance experts to develop a new digital resource devoted to finding diverse talents to serve on corporate boards. The Advisory Panel includes groups focused on women and minorities.4 The Diverse Director DataSourse, known as “3D,” will offer a facility from which to recruit individuals whose experience, skills and knowledge qualify them to be a candidate for a Board seat.5
There are many other efforts that showcase qualified board candidates. For example, there are various publications that highlight qualified candidates, such as the annual Latino Leaders Board issue. These efforts will remove one frequently used excuse to justify a homogenous board—that they can’t find qualified diverse board candidates. That age old excuse is now more bogus than ever.6
I look forward to the day that corporate boards reflect the diversity of our communities.
Diversity in the Financial Services Industry
Unfortunately, corporate boardrooms are not the only place where diversity is lacking. The lack of diversity in the securities industry is particularly acute. The most recent Government Accountability Office report on employment in the financial services industry found that the percentages of African Americans and Hispanics in senior-level management positions were just 2.8 % and 3%, respectively.7 Clearly, the industry must do substantially better.
Lack of Diversity at the SEC
Lastly, I would be hiding the ball if I didn’t also point out the lack of diversity at the SEC. While 32 percent of the SEC work force comprised people of color in 2010, only 19% of our attorneys were people of color. The most telling numbers are of our senior officers. As of fiscal year 2010, the SEC’s senior officers were approximately 90% white, 3% African-American, 2% Hispanic and 2% Asian. The gender breakdown among these senior officers is 69% male and 31% female.
Moreover, I find it puzzling that the SEC, an agency known for championing full and fair disclosure, does not publicly release its EEOC data on its workplace diversity. All covered federal agencies, of which the SEC is one, are required to file an annual report with the Equal Employment Opportunity Commission, entitled the “Federal Agency Annual EEO Program Status Report.” Many federal agencies, including ones with much larger workforces—most notably, the United States Army, the Department of Veterans Affairs, and the Department of the Interior—publically disclose these reports which include data regarding the gender, racial, and ethnic makeup of their respective workforces. I think it is past time that the SEC should do the same.
It is absolutely clear that the SEC is not doing enough to recruit, retain, and advance minority candidates at the professional and senior leadership levels. And it’s clear that candidates exist. Over the last year, I’ve personally hosted a number of events to attract diverse candidates to the SEC. For example, just last week, I moderated an SEC-sponsored recruiting event targeting minority professionals. This event, the SEC Professional Career Roundtable, attracted a number of interested minority professionals. I moderated similar events in May and September of last year and combined these events attracted nearly 800 attendees. I mention these events because they illustrate the significant interest of diverse applicants in the SEC.
However, attracting top quality diverse candidates is useless unless there are established processes and internal commitments to ensure that these candidates are given appropriate consideration. The SEC senior staff making the hiring decisions must understand the persistent lack of diversity and they must undertake to interview the best and the brightest by conducting a comprehensive search. In my mind, no search can be comprehensive if the talent pool is homogenous and artificially limited.
I am committed to improving the diversity of the SEC’s workforce and I am continuing to work closely with our Office of Human Resources to do just that.
Section 342 of the Dodd Frank Act — Office of Minority and Women Inclusion
Moreover, Section 342 of the Dodd-Frank Act requires that the SEC undertake significant efforts to recruit and promote employees from all backgrounds. In particular, Section 342 requires that the SEC, and all other financial regulators, establish a new Office of Minority and Women Inclusion. Many of our financial regulator counterparts, like the FDIC, the Federal Reserve, and the Department of Treasury have already established this program and have the new office, director and staff in place. I look forward to the SEC establishing its office and quickly catching up to our counterparts.
This Office will be responsible for all SEC matters relating to diversity in management, employment, and business activities. The Director of this Office will be tasked with a broad mandate to develop standards:
- for equal employment opportunity and racial, gender, and ethnic diversity of workforce and senior management;
- for increased participation of minority-owned and women-owned businesses in programs and contracts of the agency; and
- for assessing diversity policies and practices of SEC regulated entities.
In addition, this Office must apply a policy that is designed to ensure, to the maximum extent possible, the fair inclusion of women and minorities in the contracting process. If the Director of the Office comes to the conclusion that a contractor has not made a good faith effort to include women and minorities in its work force and subcontracts, the Director can recommend that the contract be terminated.
I look forward to the establishment of this new Office and I promise you that I will provide it with all the support that I can.
Lastly, I want to say a brief word about financial literacy — particularly about the need to expand financial education in the Hispanic, African American and other minority communities. I believe that the lack of financial education has resulted in the small number of investments made by Hispanics and African Americans. A recent poll indicated that only 46% of African Americans and 32% of Hispanics said they had an individual retirement account or any similar retirement plan.8 The same poll indicated that only one in six Hispanics and one in four African Americans reported owing stocks, bonds or mutual funds. That contrasts with 50% of whites reporting they own stocks, bonds or mutual funds and two-thirds reporting they had IRAs, 401(k)s or similar holdings.9
Additionally, minority communities still lag behind whites in another staple financial instrument: holding a checking or savings account. Over 21% of black households are “unbanked” meaning that they do not have a checking or savings account. Further, over 19% of Hispanic families and 15% of Native American families are also “unbanked.” Compared with the approximately 3% of white households who are “unbanked,” this gap reflects a significant problem in basic financial literacy education in our minority communities. We clearly must do a better job to empower all Americans with a comprehensive education in personal finance.10
Under new legislation the SEC is required to conduct a study, due in FY 2012, which assesses the existing financial literacy of retail investors, and identifies methods to improve disclosures made to investors and identifies the most useful information investors need to make informed investment decisions. In fact, this month the SEC began asking for public comment on the study, and I encourage each of you to submit comments.11
I have urged the staff to pay particular attention to the needs of minority communities. This is an area in which the SEC can have a positive impact.
The disheartening statistics and persistent lack of diversity that we see is unacceptable. For those of us who want to see things improve, it means we still have our work cut out for us. I promise you that I will do my part. Together we can make a difference.
Thank you for having me here today.
1 “Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value.” See http://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/diversification-strategy.pdf.
2 See Alliance for Board Diversity. “Women and Minorities on Fortune 100 Boards.” (January 17, 2008), available at http://www.catalyst.org/press-release/55/new-alliance-for-board-diversity-
3 See http://www.agendaweek.com/media/pdf/agendaweek.com/
4 Such as representatives of the New American Alliance and Catalyst.
5 The Corporate Library was retained to perform this work. See http://www2.gmiratings.com/news_docs/15530405113dpr.pdf.
6 For example, another program that lists minority and women board candidates is the Director Diversity Initiative, a joint project of the Center for Banking and Finance and the Center of Civil Rights at the University of North Carolina School of Law, http://ddi.law.unc.edu/default.aspx. In addition, the Business Leaders of Color publications feature viable candidates for Fortune 1000 companies’ boards of directors, www.chicago-united.org/blc-body.htm.
7 Government Accountability Office. Financial Services Industry: Overall Trends in Management-Level Diversity and Diversity Initiatives, 1993-2008. (May 12, 2010), available at http://www.gao.gov/new.items/d10736t.pdf.
8 See FDIC’s December 2009 National Survey of Unbanked and Underbanked Household, http://www.economicinclusion.gov/about_survey.html.
9 Michael Fletcher. “Black, Hispanics hold few investments, poll shows.” The Washington Post (February 21, 2011), available at http://www.washingtonpost.com/wp-dyn/content/article/2011/02/21/AR2011022104350.html.
10 See Catherine Rampell. “‘Unbanked’ America.” The New York Times. (December 4, 2009), available at http://economix.blogs.nytimes.com/2009/12/04/unbanked-america.
11 See Comment Request on Existing Private and Public Efforts to Educate Investors. http://www.sec.gov/cgi-bin/ruling-comments?ruling=4-626&rule_path=/comments/4-626&file_num=4-626&action=Show_Form&title=